Housing matters because everyone needs somewhere to live – it is fundamental to our wellbeing, Reserve Bank of New Zealand – Te Pūtea Matua – Chief Economist Paul Conway says in a speech today to the National Property Conference 2022.
Housing also matters because housing is by far the most common and most valuable investment for many New Zealanders.
On the flip side, rent and mortgage costs are also the biggest expenses for households. Building houses is a big source of jobs in our economy too – tens of thousands of people work in residential construction for their livelihoods.
The housing market is also a key link between the real economy and the financial system in New Zealand, with home loans dominating the balance sheets of commercial banks.
So, understanding how the New Zealand housing market works is really important for us at Te Pūtea Matua, Mr Conway says. His speech focuses on several RBNZ research papers on housing, also published today.
This research shows that over the years, the demand side of the housing market was boosted by strong population growth, steadily declining neutral interest rates and a favourable tax system. The supply side, however, has been held back by strict land use regulations, and a construction sector prone to boom-bust cycles, while carrying very high building costs. Excess demand led to New Zealand’s experience with some of the highest house prices relative to income in the developed world.
A sense of ever-increasing house prices may have also distorted the investment options of New Zealanders, along with a lack of other quality investment alternatives in this country.
Are these dynamics likely to continue in future? Since August 2021, the Reserve Bank has been tightening monetary policy, lifting the Official Cash Rate, to rein in inflation. This will likely see actual house prices move back towards sustainable levels that are more in line with market fundamentals. Indeed, in the May Monetary Policy Statement, we forecast a 15 percent decline in house prices from their peak, which would bring them roughly back to sustainable levels.
Over a longer time frame, there are reasons to think that some of the core market fundamentals that determine sustainable house prices may also be changing. On the demand side, as the pandemic slowly recedes and international travel restrictions unwind, many New Zealanders are heading overseas seeking new experiences. On the other hand, immigration is unlikely to return quickly to pre-pandemic levels, contributing to slower population growth overall.
At the same time, urban planning rules are being freed up to unlock more housing supply.
These changes are consistent with more houses being built and currently high building consents translating into more actual houses. They also imply that housing market dynamics in future are unlikely to be the same as in the past. Given the importance of housing in our economy and national psyche, this will be a huge change.
For several decades, we have traded houses among ourselves at ever-increasing prices in the belief that we were creating prosperity. But the tide may well have turned against housing being a one-way bet for a generation of Kiwis. We need to keep building a new approach to housing and economic prosperity in Aotearoa-New Zealand.