The effects of population and credit shocks on housing prices are much more long term than has been previously realised, say Arthur Grimes and Sean Hyland of Motu Economic and Public Policy Research.
Their finding has been outlined in their recently published article in Volume 33, April 2015 issue, of Contemporary Economic Policy and emphasises the more detailed work in their 2013 Motu Working Paper 13-12. This particular paper explored the housing market dynamics and the Global Financial Crisis. It showed that even temporary financial or population shocks have an influence on the housing market that far outlasts the particular crisis itself. Both kinds of shocks cause long term oscillations within the housing market because of the length of time it takes to build enough houses to cope with the changes.
First of all they looked at a population shock, taking the example of Manukau City whose population grew 16% between 2001 and 2008. There was a surge in house prices and it took nine years for supply of housing to catch up with the increased demand.
The Global Financial Crisis was another type of shock as it caused a prolonged increase in credit restrictions by banks, curtailing purchasing power of potential developers in the housing market. In time prices of houses increased due to scarcity of supply and the effects are still being felt today.
Their research is very relevant in today’s housing market. Two current realities – the high levels of inward migration and Reserve Bank moves to dampen down investment in housing - are compounding the now recognised long term effects of the Global Financial Crisis. February was a record month for net migration and it was the seventh consecutive month for which the record has been broken. The model of Grimes and Hyland predicts that continued high level of inward migration is increasing demand for housing and will be a factor in pushing prices up. Similarly the LVRs and the Reserve Bank’s proposal to create a new asset class for property investors and implement specific rules for this class may well constrain the supply of housing and increase prices.
While these effects have been well documented, and there are likely to be a number of other factors at play in the current situation, the Grimes/Hyland research alerts policy makers to the fact that their decisions have effects for many more years than they expect. This is a valuable insight which must be taken seriously.
Read more about this research in their media release
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