WELLINGTON: A recent study has assessed the reasons for a rapid rise in housing prices and rentals in the last 20 years in New Zealand’s Hamilton and Waikato regions.
For the Waikato Region, between March 2002 and June 2021, house prices increased by 372% and rents by 114%, the study found out.
Incomes increased by only 98% over the same period, while national construction costs increased by 142%.
The study was authored by the Housing Technical Working Group, a joint initiative established to improve government’s technical understanding of the housing market.
Housing Technical Working Group chair Dominick Stephens said the assessment focusses on the Hamilton Waikato area to draw insights for the rest of Aotearoa New Zealand.
“The key conclusion is that a combination of a global fall in interest rates, the tax system, and restrictions on the supply of land for urban use were the main cause of higher house prices in Aotearoa New Zealand over the past 20 years,” Dominick Stephens said.
Factors such as population growth and construction costs were seen as playing a more modest role.
The global decline in interest rates inevitably led to a sustained reduction in borrowing costs in New Zealand, increasing demand to buy houses.
“If land supply had been more responsive this would have sparked a larger housing supply response, moderating any initial lift in house prices and putting downward pressure on rents. Instead, restrictions to land supply meant that much of the fall in interest rates was capitalised into, or captured by, higher urban land prices.
“Higher urban land prices led to higher house prices without increasing the incentive to build dwellings.”
The report also noted that when land supply is restricted, changes to the tax system will tend to affect the value of urban land rather than affecting dwelling supply or rents.
“While the paper today contained an assessment of what has happened, a lot is changing. Urban planning is being reformed to free up land supply and tax settings have been changed for investors.”
The study found that deposit affordability has declined sharply, with the required deposit increasing significantly relative to income.
Mortgage affordability – the cost to service a mortgage – had improved due to the decline in long term interest rates, although the very recent increase in mortgage rates has largely reversed this.
Rental affordability improved from around 2007 through to 2014, but since then an increase in people per dwelling has put pressure on the supply and demand for housing causing the recent decline in rental affordability.
The relative affordability of Hamilton Waikato housing compared to Auckland increased demand from movers, first home buyers and investors, contributing to population and price growth.
A number of metrics indicate that land supply has not been responsive to increased demand, consistent with the strong growth in section prices and the increase in the house price to rent ratio.
“If land supply becomes significantly more abundant, price-setting dynamics will change. Therefore, how Government and Reserve Bank interventions impact the housing market will also change,” the study said.