What’s up with New Zealand’s housing market?

PHOTO: PHOTO: GETTY/JESSIE CASSON

Economists warn that house prices are about to see a sharp correction. The NZIER public good team explains why this is happening, and how we can handle it.

For the first time in recent history, New Zealand has been preoccupied by something that isn’t the housing market. With the entire country locked down for four weeks, there have been bigger fish to fry. Now that the lockdown has loosened and the Reserve Bank has lifted loan-to-value (LVR) restrictions, all eyes will be on house prices – will the market be flooded with ex-Airbnb rentals? Will depleted Kiwisavers stop new buyers? Here, we explore how changes in the housing market don’t just affect buyers and sellers; they can affect us all.

What will the real estate industry look like in 2021?

If you haven’t heard, houses in New Zealand are expensive. Really expensive. It’s not just wannabe homeowners making noise about nothing, it’s official; in 2016, the International Monetary Fund found New Zealand has the highest house-price-to-income ratio in the world. To make matters worse, our houses are also not even great quality – one Otago researcher found up to 10% were unfit for living. Recently, the state of our housing market was bad enough for a United Nations official to declare it a threat to human rights. That’s because expensive housing contributes to heaps of problems; overcrowded houses are bad for health, increase family violence, and widen inequality by disproportionately affecting Māori.

Despite the soaring prices, agreement on the significance of home ownership continues to unify the nation. It’s important for us culturally; alongside a quarter acre, a car, and 2.5 kids, home ownership completes the Kiwi dream. But it’s also important because renting is rubbish. You’ll have heard the rumours about landlords from Hell, who turn a blind eye to mouldy carpets, and make sudden rent increases. While there are rules in place to protect renters, in reality it’s often hard to find alternative housing, leaving renters in a difficult position. But ownership isn’t plain sailing either, with mortgages hard to get and taking longer and longer to pay off. We know New Zealand is special for many reasons, but what is it that makes our houses so pricey?

Why are our houses so expensive?

Firstly, when we talk about house prices, it’s helpful to differentiate between house and land prices. Actually, research from Statistics New Zealand and NZIER finds that the house bit – including the building materials and labour – has stayed relatively stable over time. It’s the price of the land you build on that is seriously increasing. It essentially comes down to a standard observation underpinning how prices are determined; demand and supply. Our demand for space to live is increasing (due to normal population growth and migration) but the amount of space available is limited.