New Zealand house prices have risen significantly in the past 12 months. This has raised concerns at the Reserve Bank of New Zealand – Te Putea Matua about the risk this poses to financial stability.
Central banks responded swiftly to the global economic shock caused by COVID-19, making it cheaper for households and businesses to borrow. These initiatives were complemented by the support provided by Government policies and helped to avert a more serious financial crisis, but also had the flow-on effect of boosting asset prices. In our case, with strong population growth and limited housing availability, house prices climbed from already elevated levels, and debt levels rose with them. This has led to pockets of vulnerabilities as some households have borrowed a lot compared to their income to buy homes at historically high prices.
We are also developing our understanding of what contributes to sustainable house prices and how we can integrate this into the financial policy decisions we make. As there is no one measure of what is considered ‘sustainable’, we are taking a wider view, looking at the drivers of supply and demand in the housing market, as shown by the image below.
Everyone needs a place to live, whether that is through renting or home ownership, and a significant share of income is spent on housing.
People who are deciding whether to buy a property, or continue renting, are a key group contributing to housing demand. If house prices rise too much then the incentive to own diminishes, and prices may not be as sustainable.
Another key group is investors, who decide whether to invest in housing and rent it out or to invest in other assets. Tax changes, improved property standards and more house-building reduce the returns on housing, potentially making alternative investment options more worthwhile, resulting in lower house prices.
This diagram reflects how we are assessing the sustainable level of house prices – by considering the value that people derive from housing services and understanding the drivers of demand and supply.