House price affordability, the global financial crisis and the (ir)relevance of mortgage rates

Graham Squires,Don J Webber

doi:10.1080/21681376.2019.1643777

Graham Squires, Don J Webber

Open Access

https://doi.org/10.1080/21681376.2019.1643777

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Abstract

ABSTRACTAlthough house prices and wages are both influenced by distinct factors that shape their own evolutions, they are also intrinsically connected through house price affordability. Further, macroeconomic policies centred around adjustments in the mortgage rate are of prime importance in ensuring that the housing market does not overheat. This study contributes to the understanding of the link between housing market affordability and mortgage rates by investigating this association across regions of New Zealand using quarterly data between 2000 and 2017. Applications of trajectory regression reveal that the global financial crisis affected regional house price affordability asymmetrically and there was no statistically significant correlation between house price affordability and mortgage rates.

Highlights

Housing affordability is recognized as an increasing problem for many cities and countries around the globe (Baker, Bentley, Lester, & Beer, 2016; Voith & Wachter, 2009)
The Central Otago Lakes, which contains Queenstown, saw significant house price increases following the global financial crisis from approximately NZ$400,000 rising to NZ$750,000 in 2017, but this region’s housing market, where demand is typically driven by second homes, is more volatile due to a lower quantity of housing stock compared with the Auckland region
The evolution of house price affordability is an important issue to understand for governments, academics and the general public alike

Summary

Introduction

Housing affordability is recognized as an increasing problem for many cities and countries around the globe (Baker, Bentley, Lester, & Beer, 2016; Voith & Wachter, 2009). The reasons for such concerns are in part the result of the exponential house price growth in urban areas since the turn of the century (Harvey, 2012). One lever to control house price growth is perceived to be in the setting of interest rates (Hubbard & Mayer, 2009). Interest rate changes influence patterns of spending and saving, and affect housing decisions such as choosing which assets to invest in (Damen, Vastmans, & Buyst, 2016)

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