Long-term house price growth in New Zealand will have different drivers in the future
Over the past 30 years house prices in New Zealand have grown by an average of 7% per annum. Growth has been subject to cyclical fluctuations with some years being negative and other years being positive, but in the long run, people have been able to bet on decent capital gains.
December 10, 2023
The most recent national housing market peak was November 2021 with a median sale price of $925,000 during that month. After that, prices declined but they have been rising since January 2023. People are increasingly talking of a housing market recovery with current pricing of $795,000 being $30,000 higher than the January figure. Some commentators who are looking further ahead think that it isn’t long before house price growth takes off at pace given that New Zealand has record migration and increasingly constrained supply. This paper takes a longer-term view of house price growth and identifies the two historic drivers that have largely run their course and are likely to have a lesser impact on the future rate of house price growth than previously.
The first is the impact of women in the workplace and the subsequent lift in household incomes. For children raised in the 1990s, it was reasonably common to have a stay-at-home mother while the father was the sole income earner for the household. Of the 1.33 million women aged 15+ in 1991, 49% or 650,000 were not in the labour force. Census data from this year does not break down age groups but given that life expectancy was lower in 1991 and the population distribution was weighted more toward younger age groups than it is today, it is probable that most of the women were working age.
Fast forward thirty years and the total potential female workforce in New Zealand has grown from 1.33 million to 1.93 million, but the number who are not in the labour force has increased by far less, going from 650,000 to 690,000. This means that the proportion of women not in the labour force has dropped from 49% to 36%, with almost half of this 36% attributable to the 65+ age group. There is potential for this to decrease further over time as the current proportion is still 9% higher than the 27% of men not in the labour force, although it is unlikely to match the male proportion given the higher life expectancy of females vs males.
The decrease of 13% observed over the past 30 years and the limited potential for this to decrease further, indicates that the structural shift in the gender makeup of the labour force has largely materialised and the flow-through impacts are now status quo. More women in the workplace has impacted family and household incomes by essentially adding a whole extra income earner. These increased incomes have lifted the capacity to pay for housing in a way that is unlikely to have a similarly high impact in the future.
The second historic driver of national house price growth is interest rates and their remarkable downward trend over the past thirty years. Interest rates are an important driver of past house price growth as they directly affect the cost of mortgages and with lower mortgage costs people have been able to pay more for housing while retaining overall affordability. The floating mortgage rate in June 1987 was 20.5% and in June 2021 it was 4.37%. This large decline has had a profound impact on the interest component cost of repayments meaning that proportionally more was able to be put towards the principal.
The house price growth data during COVID-19 demonstrates that the financialisation of housing markets can override fundamental supply and demand by having an element of speculation. When borders were closed, Auckland lost population for two consecutive years but house prices grew at a near-record annual rate, peaking at 27%. It is widely recognised that lower interest rates during this time were a driver of demand. Legislative LVR ratio barriers to investment purchases were removed at the same time as part of the COVID-19 stimulus measures, effectively adding a dimension of housing demand that also had an increased capacity to pay more for dwellings due to a record low interest rate.
The current floating rate is the highest it has been in 15 years at 8.61% and is unlikely to see much, if any, further increases in this cycle. This indicates that the scale of future declines in interest rates is unlikely to match that of the 20.5% to 4.37% drop that occurred between 1987 and 2021, limiting the impact of this as a driver of future house price growth.
While we believe that the historic house price growth drivers of additional female income and decreasing mortgage costs have largely run their course, predicting the future trajectory of national house prices is a fool's game and various predictions have been proven wrong time and time again. House price growth could very well be similar to past performance, but we expect that this would require the emergence of a new driver such as a greater level of productivity in the economy. Until something like this emerges the quantum of growth could potentially be more akin to the ~4% long-term average growth observed in rent prices rather than the ~7% long-term house price growth observed in the past.