Interest Rates, Policy, and Property Market Forces in NZ

Macroeconomic Drivers of Residential Property Values

Interest rates and monetary policy significantly affect residential property capital values. The official cash rate (OCR) — the rate at which banks borrow from the Reserve Bank — determines the general level of interest rates. When the OCR increases as a result of monetary policy, interest rates are likely to rise, and vice versa. These movements have a direct impact on the housing market. An increase in interest rates usually means a higher cost of borrowing and reduced consumer confidence, consequently affecting house prices and sales. Similarly, a decrease in interest rates lowers the cost of loans, improves consumer confidence, and tends to increase property demand and prices.

Residential property capital values are also affected by inflation — the general increase in prices across the economy. During periods of high inflation, there is usually increased investment in residential property. Consumers and firms with cash reserves or borrowing capacity feel incentivized to invest in real estate and other assets that tend to gain value in inflationary environments. Nonetheless, high inflation often makes it difficult to predict future price movements, thereby increasing market uncertainty. This may consequently place pressure on real estate values, warranting intervention by the Reserve Bank, which raises the OCR to increase interest rates and reduce inflation.

Supply and demand are inherent characteristics of a competitive market. In the property market, there is a direct — though not necessarily proportionate — association between demand and price, and an inverse — though not necessarily proportionate — association between supply and price. This means that reduced housing supply due to a slowdown in the construction industry, for instance, will result in higher prices, though the increase will not be proportionate to the shortage. Equally, reduced housing demand will cause a decrease in property prices, but not in direct proportion to the reduction in demand.

Net migration influences residential property capital values by affecting population growth. As population increases, the demand for housing rises, consequently affecting yields and prices. The impact of net migration on property prices is especially significant in New Zealand, where net migration has generally been positive every year. It should, however, be noted that the extent to which migration affects property capital values depends on the scale of the gain or loss. For instance, the effect of a small net gain may still be felt if factors such as unemployment and political uncertainty are already placing pressure on the market.

Employment trends continue to evolve. Workforce ageing, a growing immigrant workforce, increased employment in service industries, and changing job types and work practices are now common phenomena, particularly in New Zealand. These trends affect the housing market by influencing the level of mortgage uptake and default rates. As the labor market tightens, a significant portion of the workforce may become redundant, leading to income losses. This consequently increases loan defaults and reduces consumer appetite for debt. Property investors, however, may benefit during employment downturns by acquiring properties at lower prices. When the labor market improves, consumers regain appetite for debt, resulting in increased investment in property.

Regulatory and Policy Influences on the Property Market

All buildings in New Zealand are subject to the provisions of the Resource Management Act (RMA) and the Building Act. The RMA regulates land use, water consumption, the use of coastal space, and the discharge of contaminants into the environment — including water, soil, and air. The Building Act regulates the construction, modification, demolition, and maintenance of both new and existing buildings. These regulations may affect the property market by increasing bureaucracy in property development, subsequently slowing down construction processes. This can constrain the supply side of the property market, thereby affecting capital values. In Auckland, for example, RMA reforms have contributed to increases in capital values and prices.

Immigration policy in New Zealand has shifted significantly over the years, with emphasis now placed on merit and skills rather than race or nationality. This shift has increased migration to the country, and New Zealand today is home to a considerable immigrant population. Increased migration affects the housing market by growing the overall population. Immigrants from particular countries often settle in specific locations, and family members of immigrants tend to prefer settling nearby. This population growth increases housing demand in those locations, thereby affecting property values. Conversely, an unfavorable immigration policy would reduce migration, consequently dampening population growth and housing demand.

Changes in taxation and government expenditure can also affect the housing market by influencing both supply and demand. Increased taxation reduces disposable income, diminishing the ability of consumers and businesses to service loans; reduced taxation has the opposite effect. This translates directly into increased or reduced demand for property. Government expenditure affects the housing market primarily through infrastructural investment. When the government invests more in infrastructure — such as transport systems, sewerage systems, electricity networks, and social amenities — property investors are incentivized to develop more housing, thereby increasing supply. Reduced government expenditure produces the opposite outcome.

There are three types of tenants: short-term (periodic) tenants, long-term (fixed) tenants, and company (service) tenants. Each type has implications for the housing market. Short-term tenancies may increase rental income volatility, while long-term tenancies tend to reduce it. Service tenancies are generally considered less preferable compared to long- and short-term tenancies in terms of overall appeal to property investors.