The causes and economic consequences of rising regional housing prices in New Zealand

Abstract

This paper explores the causes and economic consequences of recent increases and divergences in regional house prices in New Zealand. It identifies large and increasing ‘wedges’ between house prices and underlying supply costs. These house price distortions arise from the collision of rising demand for housing with housing supply constraints, including zoning rules that limit new subdivision and redevelopment of existing sites. Regions with larger starting price distortions appear to have experienced larger increases in house prices and rents in response to migration shocks. This results in large economic costs due to misallocation of labour away from high-productivity regions in New Zealand and increased net migration to Australia. A calibrated spatial equilibrium model is used to investigate what would have happened if house price distortions had increased at a slower rate in recent decades due to relaxation of supply constraints. This model implies that comprehensively removing constraints to housing supply would have increased New Zealand’s total economic output by up to 8.4%, increased per-worker output by 0.9%, and eliminated recent net migration outflows to Australia. More plausible counterfactual scenarios would result in smaller, but still economically meaningful, gains on the order of one to five percent of gross domestic product.