Treasury Deputy Secretary Dominick Stephens

A joint study by the Treasury, the Reserve Bank and the Ministry of Housing has busted one of our great political myths.

Ask any MP from National or Labour, and they would – up until yesterday – have told you that housing supply determined house prices.

But the study shows that the reason house prices rise is not that simple.

The trigger that kicks off rising prices is the interest rate.

The study does not claim that interest rates are the sole cause of rising house prices; taxation policies and land availability both play crucial roles.

So the study set out to find why rents did not rise at the same rate as house prices.

At the centre of the study was a comparison of rents and house prices in the Waikato between 2001 and 2022, and it found that house prices increased by 372% and rents by 114%.

The study said that it was commonly asserted that a lack of dwelling supply relative to population had been a key driver of rising house prices in recent decades.

“But physical supply and demand should affect rents as well as prices, and over the past twenty years, house prices have risen far more than rents.

“Our key conclusion is that a combination of a global decline in interest rates, the tax system, and restrictions on the supply of land for urban use have led to a large change in the ratio of prices to rents and are the main cause of higher house prices in Hamilton-Waikato, as well as other parts of Aotearoa New Zealand, over the past 20 years.”


As the study notes, this flies in the face of conventional political opinion.

Then-Minister of Housing Phil Twyford, in 2019, launching his Urban Growth Initiative, said restrictive planning was stopping our cities from growing, driving up the price of land and housing,

In 2021, then-National Leader Judith Collins said the cost of land had to be brought down by faster re-zoning and being able to get consenting done, and criticised government policy requiring councils to free up land saying “a stocktake is not something you can live in”.

“Prices would drop once there were more houses built than people wanted to buy,” she said.

“It is all about supply and demand. There is nothing magical about this – we need more houses and more accommodation.”

The study found that in the Waikato, mortgage payments on any given house had increased at about the same pace as incomes over the past 20 years.

“This is the key reason that some New Zealanders have been willing and able to pay such high prices for houses, but it has come at the cost of increasing the barrier for others to home ownership,” the study said.

What will surprise many is that the assumption made by Judith Collins, that it was all about supply and demand, is not necessarily true.

“There has been no consistent link between supply shortages and house prices in Hamilton-Waikato over recent decades,” the study said.

“Dwelling supply outpaced population growth from 2004 to 2007, a period of very rapid house price inflation.

“House prices also increased quickly when Hamilton-Waikato experienced a large undersupply of housing relative to population growth from 2014 to 2019, a period when net immigration to New Zealand was elevated and as people from Auckland moved to the Waikato region.

“However, population growth in Hamilton-Waikato fell sharply soon after the onset of Covid-19 and residential construction activity accelerated further, yet over 2020 and 2021 house prices rose even more rapidly than over the previous five years.”

The study looked at the impact restricted land supply had on housing.

“The key driver of house prices over the last twenty years has been the global decline in interest rates that significantly reduced the cost of debt servicing and increased home buyers’ ability to pay,” it found.

“The resulting increase in demand inevitably caused an initial lift in prices.

“If land supply had been more responsive, then over time that initial price rise would have incentivised a larger housing supply response, causing prices to retreat and rents to fall below their initial levels relative to income.”

But that didn’t happen because land supply was restricted.

Due to restrictions on land supply, much of the global decline in interest rates was instead capitalised into, or captured by, higher land prices.

“As land prices rose alongside house prices, there was less change in the incentive to build new houses and less of a supply response.

“Consequently, the initial price rise caused by lower interest rates persisted.”

But Treasury Deputy Secretary, Dominick Stephens, speaking at a media briefing yesterday on the study, said there was little the Reserve Bank could have done about the low-interest rates which sparked the price increases.

“The one thing we have identified is that it’s the long-term average interest rate that matters for house prices,” he said.

“There’s been a long-term fundamental decline around the world, and the balance between savings and investment has led to a change and a global change in interest rates.

“And actually, there’s not much New Zealand could have done to stand in the way of that trend, and there is little the Reserve Bank can do about that long-term trend and interest rates.”

But interest rate changes cut both ways, and when they rise, house prices fall, as New Zealand is seeing currently.

“Our conclusion remains that as interest rates are expected to lift even further, that downward pressure on house prices in the short term is the likely outlook; aided and abetted by recent changes to the tax system and the changes to the availability of land and regulations around that,” he said.

The study also looked at the impact of tax changes on house prices; simply, they found that tax changes tended to get capitalised into the land supply.

So that a capital gains tax or a tax on homeowners would see rents increase when there was abundant land supply, but land house prices would be unchanged.

If land was restricted, then land prices would decrease, and house prices would decrease, but there would be no change in supply, and rents would be unchanged. 

The study identified other complex issues with tax, particularly “imputed rents”, which is the rental price an individual would pay for an asset they own.

That is not taxed, whereas other forms of income earned on investments are taxed, which the study said increased “the incentive to purchase housing relative to other forms of consumption, creating an incentive for people to live in bigger or better houses than otherwise.”

Both the lack of taxation on imputed rent or capital gains in housing increase the investment value of housing relative to other investments.

“Devoting resources to owner-occupied housing yields untaxed shelter in perpetuity as well as untaxed capital gain, whereas saving money in the bank or investing in one’s education will yield a taxed stream of future income,” it said.

“Similarly, investing in rental housing yields tax-free capital gain for those who hold the property for long enough.”

The study team will now move on to looking at the factors that drive land supply for housing.