In their Financial Stability Report the other day, the Reserve Bank suggested that low interest rates are a significant part of the story as to why house prices have risen so much, and are so high. I showed this snippet in an earlier post.
Not only was there no sign of any analysis of the reasons why interest rates remain low – they aren’t just some random variable delivered to us from on high, but arise from the interplay of real economic forces – but they started their analysis from the trough of the financial crisis and (just to compound things) showed asset prices in nominal terms.
The Reserve Bank indicated that they were using the OECD house price index, so I had a look at that data. Conveniently, the OECD presents the data in real terms, and they provide individual country data for most member states.
In this chart, I’ve shown three lines – each starting from 2007q4, just prior to the international (and domestic) downturn beginning. It wouldn’t materially change the chart if I started a year earlier (the peak in US house prices was 2006q4. Here I’m showing real house prices for New Zealand, for the median of the 30 or so OECD countries for which there is complete data, and the OECD total series (the real equivalent of the line the Reserve Bank showed).
Over the full ten year period, real house prices in the advanced world as a whole have barely changed, while in New Zealand real house prices are now 40 per cent higher than they were at the previous peak (having already risen more than in the typical OECD country in the previous surge). Not one of these countries – well, there is a possible exception of Turkey, in the midst of a currency crisis at present – has interest rates anywhere as high as they were 10 years earlier.
In this chart, I’ve just shown the individual country data.
New Zealand’s experience isn’t uniquely bad by any means, but it isn’t representative either. It didn’t have to be this way, but it was a predictably awful outcome once one knew that land-use laws weren’t being materially altered, and the sheer scale of the population pressures government policy has contributed to. The combination has been toxic, especially for young people who were already struggling to get into the market.
It isn’t even some sign of general success either. Your eye might go to Greece and Spain at the far left of the chart. But other countries to the left of us include, for example, the group of central and eastern European countries that I’ve written about previously, who’ve been catching-up and achieving consistently better productivity growth than New Zealand (the Czech Republic and Poland aren’t on the chart because the data for each doesn’t cover quite the full period – but on the data we have both would also be well to the left of New Zealand). Our house price debacle has been a disaster all of our own – well, our central and local politicians’ – making. It just didn’t need to be that way.
croaking cassandra 
“RBNZ suggests low interest rates are a significant part of the story as to why house prices have risen so much, and so high”
Which part I wonder
To believe the proposition “low interest rates” are ….. the data at the local level would have to “consistently” show common behaviour across all cities and suburbs throughout NZ. If they don’t then the answer is elsewhere.
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We had house prices double between 2002 and 2007 with interest rates much higher than they were now. Yes in theory low interest rates so this but data shows its credit creation by banks that boom assets and interest rates have not always been the key.
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Functional ambiguity
Pricing pressure from low interest rates can come from either
(a) cashed up sellers who are reluctant to accept a low taxable return on their cash-asset sitting in a bank and do not wish to be out of the property market
(b) buyers who rely on borrowed money can extend their buying range in a low interest rate climate
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Congratulations to Sir William English knighted today on the Queen’s birthday celebrations. Well done!
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Concur he was one politician who put his country first and wasn’t drivin by individual greed and status. Unlike our current coalition.
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It is interesting that the previous government had from 2008 to 2012 to bed in land-use reforms before house prices took off.
It was well known by 2008 that reform of land supply for housing was necessary.
But the government was lazy or lacked the will or maybe they lacked the strength to change the entrenched silos in local and central governmemt. Whatever the problem was it meant nothing significant changed wrt land-use reforms.
So the obvious happened and the housing market got away from the government. As a consequence the government lost credibility.
I wonder if the new government will do any better?
So far they have used up 9 months and there has been no significant land-use reforms….
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Phil Twyford although very critical of the National government is finding it just as hard as Nick Smith in resolving this housing issue. Funding infrastructure as per Phil Goff estimate is a $30 billion issue. I suspect that value is understated because a huge amount is lumped onto developers. I was made to certify the public drainage costs I had gifted to Council so that they could record the asset on their books recently. The amount certified was only the hardware costs which was $20k but what was missing was the earthworks, the cost of removal of existing concrete and reconcreting after installation, the 5 man holes and cesspits installation amounted to another $80k. just to add 1 additional dwelling onto the site for a 3 site subdivision with 2 existing houses.
Until now there has been no solution to this infrastructure issue other than lets just try and lump it onto developers and expect that the cost of housing does not keep rising.
Severe height limits imposed onto 40 million sqm of land due to volcanic sensitivity and viewshafts does keep most of Auckland with 57 sacred volcanos low rise and low density. Initially I thought that Auckland planners just had this silly idea of maintaining the unique beauty to be viewed by every public park at the expense of housing people but since the volcano in Hawaii irrupted and the unstoppable lava flow and the damage to surrounding houses and our volcanos are of a similar nature it does seem now the right thing to do. We are somewhat between a rock and a hard place and moving ahead in whatever direction other than to keep moving inland away from the volcanic field seems the most logical but the most expensive option in terms of traffic congestion and connecting the various metropolitan cities. I think giving up the crown jewel which is the Auckland harbour is where most Planners and the government gets stuck.
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