Aaron Drew
BBC news in the UK recently led its business section with the headline "New Zealand tops global list for house price rises".
Auckland's median price of over $1 million is certainly eye-catching. But the strength seen in Auckland over the past year is broad-based, with house prices in the Bay and many other regions also racking up double digit percentage gains over the past year.
The usual suspects rolled out to explain the price increases are low interest rates, strong net migration and sluggish housing supply responses. All are important drivers, but one is clearly the most pervasive.
Knight Frank, a global real estate consulting firm, sees the gains in New Zealand as part of the global low interest rate environment. Their numbers suggests that housing markets are becoming increasingly correlated across countries as global interest rates have ground down lower.
There is much less dispersion in house-price changes across countries today, despite widely differing economic performances, population growth pressures, planning processes and tax treatments of residential housing. Low global interest rates are the common denominator. This suggests that New Zealand would still likely be experiencing substantial house-price gains even if net migration levels had of been lower, or if planning process were more responsive to demand conditions.
This does not mean nothing can be done to improve housing affordability and reduce financial stability risks - where there is a will there is a way.
A few countries have been able to deliberately buck the global trend, despite low interest rates. Notably Singapore has had several years of mildly falling house prices, following a massive increase in state-directed housing supply and the employment of much more restrictive prudential and tax measures than has been contemplated in New Zealand thus far. At the bottom of the pack, the negative 9.4 per cent return in the Taiwanese market has in part been driven by recent changes to its capital gains tax, where a rate of 45 per cent can be charged on a sale within a six-year period.
And lest it be forgotten, while most economists project interest rates to head lower, there is a growing number of credible economists and investment folk in New Zealand and abroad calling for higher rates given the impact that the low rate environment is having on asset prices and debt levels.
At the local level a much better job could also be done to match supply to demand pressures, limiting house-price gains to more sustainable rates.
The Productivity Commission's report released last month on urban planning provides a set of concrete recommendations to improve planning processes and provision of housing and infrastructure. A key and common sense recommendation is to make land zoning more flexible and responsive to pricing pressures, rather than on the crude and out-of-date long-term population assumptions that underpin current council planning.
This approach is sorely needed in the Bay now given numbers moving to the area, and the serious lack of new sections. Hundreds of sections are in the planning machinery across Hasting and Napier for release over the next few years, perhaps thousands should be in contemplation. A sparsely populated region built on the plains has no excuse to run out of space.
Aaron Drew is an Associate of the NZIER and Chief Investment Officer of the Stewart Financial Group, whose head office is in Hastings. His show, Real Wealth, can be heard on Radio Kidnappers on Tuesdays and on podcast.