Abstract
This paper investigates how changes in the official cash rate (OCR) affected real housing prices in New Zealand during the period 1999-2009. We find that the announced OCR changes Granger cause the real interest rate changes. We also find that the real interest rate, measured by either the real fixed- or floating-rate, is positively related to the real housing price, after controlling the effect of real rental rates. Thus, increases in the OCR do not depress the real housing price, indicating that a housing bubble prevailed in the recent New Zealand housing market. We argue that this bubble may stem from the long-term favourable taxation treatment in housing investment.
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