Housing, the NZ Business Cycle and Macro Im balances Peter Jarrett OECD Economics Department OECD Economics Department 23 June 2011
Outline 1. Features of the most recent NZ housing boom F t f th t t NZ h i b 2. How NZ housing cycles compare with those in other OECD countries other OECD countries 3. Role of housing in NZ macroeconomic cycles and imbalances and imbalances
Housing investment and GDP over the longer term Billions of NZD Billions of NZD 8000 150 A. Real housing investment B. Real gross domestic product 140 7000 130 120 6000 110 5000 100 90 4000 80 70 3000 60 2000 50 1970 1975 1980 1985 1990 1995 2000 2005 2010 1970 1975 1980 1985 1990 1995 2000 2005 2010
1. Features of the m ost recent NZ housing F t f th t t NZ h i boom 2 2. How NZ housing cycles compare with those in How NZ housing cycles compare with those in other OECD countries 3 3. Role of housing in NZ macroeconomic cycles Role of housing in NZ macroeconomic cycles and imbalances
From 2000-2007, house prices increased in NZ more than in most other OECD countries Housing price indexes across countries Index 2001=100 oom 240 240 New Zealand Canada housing bo Australia Australia Netherlands Netherlands 220 220 France Spain Ireland United Kingdom United States Belgium 200 200 180 180 180 180 he recent h 160 160 140 140 atures of th 120 120 100 100 Fea 80 80 2002 2004 2006 2008 2010 2002 2004 2006 2008 2010
… as did household debt oom Household debt As a percentage of gross disposable income As a percentage of gross disposable income housing bo he recent h atures of th Fea
Strong net migration and easy credit conditions were major drivers % of population % NZD billions oom 25 180 A. Housing prices and net migration g p g B. Lending by financial institutions g y housing bo 160 1.2 House price growth¹ (right scale) Housing 20 Net migration (left scale) Business 140 1.0 Agriculture 15 120 0.8 he recent h 100 0.6 10 80 0.4 5 60 0.2 atures of th 40 0.0 0 20 -0.2 -5 0 1990 1995 2000 2005 2010 1998 2000 2002 2004 2006 2008 2010 Fea 1. House prices measured by the Quotable Value house price index, house only; % change from previous year. Source : ANZ; Reserve Bank of New Zealand; Statistics New Zealand; and OECD Economic Outlook 89 database. ; ; ; 9
NZ has experienced one of the OECD’s highest population growth rates oom Percentage population change 20 0 0 -20 0 9 housing bo Natural change 15 15 Net migration share he recent h 10 10 10 10 5 5 atures of th 0 0 Fea -5 -5 POL DEU JPN BEL GRC FIN ITA GBR DNK KOR NLD AUT SWE FRA NOR CHE USA IRL CAN MEX NZL ESP ISL AUS
NZ migrants tend to be highly skilled Share of m igrants that are highly skilled and em ployed Share of m igrants that are highl skilled and em plo ed Percent 30 30 oom housing bo 25 25 20 20 he recent h 15 15 10 10 atures of th 5 5 0 0 0 0 Fea TUR PRT SVK HUN AUT LUX FRA CHE OECD SWE DNK FIN JPN NZL CAN ITA POL CZE MEX GRC ESP DEU GBR NLD AUS BEL IRL NOR USA
… yet owner-occupancy rates continued their long-term decline over the boom period ..suggesting reduced affordability and an increasing role for rental property investments oom NZ Owner-occupancy rates housing bo 0.76 0.74 he recent h 0 72 0.72 0.7 0.68 0.68 atures of th 0.66 0.64 Fea 0.62 Mar 91 Mar 01 Mar 11* Mar 92 Mar 93 Mar 94 Mar 95 Mar 96 Mar 97 Mar 99 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 09 Mar 98 Mar 00 Mar 08 Mar 10 31 M 31 M 31 M 31 M 31 M 31 M 31 M 31 M 31 M 31 M 31 31 31 31 31 31 31 31 31 31 31 Source: Statistics NZ
Housing supply lagged … .Number of dwellings per household began to fall in 2002; average house size is still trending up oom housing bo he recent h atures of th Fea
The response of real residential investment was short-lived and eventually fell well below long-run equilibrium levels … based on OECD estimates presented in: b d OECD ti t t d i Caldera Sanchez and Johansson (2011): panel SUR estimations, ECM oom housing bo he recent h atures of th Fea
Housing is tax-preferred oom housing bo he recent h atures of th Fea
1. Features of the most recent NZ housing boom F t f th t t NZ h i b 2. How NZ housing cycles com pare with the international experience international experience 3. Role of housing in NZ macroeconomic cycles and imbalances and imbalances
Does NZ face greater restrictions on housing supply? Relative to 21 OECD countries: • Residential investment responds to house prices at an average pace • But population changes have a much larger impact on long-run house prices in NZ than elsewhere us OECD Estim ates of LR Housing Supply Response LR House Price response to Population to Price (Caldera Sanchez and Johansson, 2011) (Caldera Sanchez and Johansson, 2011) 30 2.5 sing versu 25 2 20 1.5 15 1 NZ hous 10 0.5 5 0 0 NLD AUT ITA BEL FRA ISR UK DEU POL NOR AUS IRL NZL DNK SWE USA CHE ESP FIN JPN CAN D… N… D… S… TA USA UT OL RA RL US EL UK NZL ESP FIN SR PN AN HE LD AU IT AU PO FR CA CH NL U JP E F U B N I I
Does NZ face greater restrictions on housing supply? Supply responsiveness ¹ Supply responsiveness ¹ 2.0 USA S USA S 2.0 us OECD Correlation coefficient = -0.56 Correlation coefficient = -0.45 1.8 1.8 1.6 1.6 sing versu 1.4 1.4 SWE SWE CAN DNK DNK 1.2 1.2 CAN NZ hous 1.0 1.0 FIN JPN FIN JPN 0.8 0.8 New Zealand New Zealand IRL IRL 0.6 0.6 AUS AUS AUS AUS NOR NOR ESP ESP POL POL DEU DEU 0.4 0.4 GBR GBR ISR ISR FRA FRA BEL BEL ITA ITA AUT AUT 0.2 0.2 NLD NLD CHE CHE 0.0 0.0 0 50 100 150 200 0 200 400 Number of days to obtain a building permit ² Population density³
But regulation may be discouraging buy-to-let investment
How do NZ housing cycles compare with OECD experience? • Examine all major upturns and downturns in 18 OECD countries since 1970 – André (2010): defined by real house price change > 15% us OECD • New Zealand episodes identified: • New Zealand episodes identified: sing versu Upturns Downturns NZ hous 1970Q1-1974Q3: +73% Q Q % 1974Q3-1980Q4: -38% Q 8 Q 8% 1980Q4-1984Q2: +33% 1986Q4-1989Q1: +15% 1992Q1-1997Q3: +40% Q Q % 2000Q4-2007Q3: +98%
Real house price appreciation in upturns has tended to be positively associated with population growth across countries House price changes vs. population changes % change in real house prices over upturns % change in real house prices over downturns 250 250 -10 10 us OECD 200 -20 sing versu 150 -30 100 100 -40 40 NZ hous NZL NZL NZL NZL NZL 50 -50 NZL NZL NZL 0 -60 0 5 10 15 20 0 5 10 % population change over upturns % population change over downturns
… and negatively with LT interest-rate changes House-price changes vs. interest-rate changes % change in real house prices over upturns % change in real house prices over downturns 250 250 -10 10 us OECD 200 -20 sing versu 150 -30 NZ hous 100 100 -40 -40 NZL NZL NZL NZL NZL 50 -50 NZL NZL NZL 0 -60 -10 -5 0 5 -5 0 5 10 % point change in long-term interest rates over upturns % point change in long-term interest rates over downturns
During upturns, the share of residential investment in GDP has tended to increase more in NZ than elsewhere House price changes vs. change in residential investm ent (% GDP) % change in real house prices over upturns % change in real house prices over upturns % change in real house prices over downturns % change in real house prices over downturns 250 -10 us OECD 200 -20 sing versu 150 -30 NZ hous 100 -40 NZL NZL NZL 50 -50 NZL NZL NZL NZL 0 -60 -5 0 5 -8 -6 -4 -2 0 % point change in share of residential invest % point change in share of residential invest
… but its dwelling stock tended to grow less than average for each % increase in population Change in dwelling stock during upturns % change in dwelling stock over upturns % change in dwelling stock over upturns 90 90 90 90 us OECD 80 80 70 70 sing versu 60 60 50 50 40 40 NZ hous 30 30 20 20 NZL 10 NZL NZL NZL NZL 10 NZL 0 0 0 100 200 0 5 10 15 20 % change in real house prices over upturns % change in population over upturns
1. Features of the most recent NZ housing boom F t f th t t NZ h i b 2. How NZ housing cycles compare with those in other OECD countries other OECD countries 3. Role of housing in NZ m acroeconom ic cycles and im balances cycles and im balances
Most of the deterioration in NZ’s external imbalance since the early 1990s reflects private-sector outcomes … Sectoral contributions to the current account alances Per cent of GDP 10 10 10 10 omic Imba 5 5 acroecono 0 0 -5 -5 ing and M -10 -10 Government Private Current account balance Housi -15 -15 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
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