Mortgage Interest Rates, Rents, and Local House Price Movements in New Zealand

Abstract

Executive Summary. Using monthly data from New Zealand housing markets, this paper examined the long-run relationship between mortgage interest rates, rents and local house price movements in an error correction model. It was found that house prices, rents, and interest rates were cointegrated and local house prices mean revert to the fundamentals, as indicated by the present value model. During this dynamic price adjusting process, the effect of interest rates on housing prices differed significantly across local markets. In general, interest rates had a smaller impact than rents on house price movements and the speed of adjustment of house prices to their long-run equilibrium was slow. Finally, the paper demonstrates how analysts can use a short time series to compare fundamental value to market price in a way that may lead to some predictability of local house price movements.