Land supply restrictions main cause of rampant house prices

The Treasury, Reserve Bank and the Housing and Urban Development Ministry formed the Housing Technical Working Group and published a joint paper providing an assessment of the key boosters of house prices and rents and their impacts on households over two decades. The group found regulations and other constraints to urban intensification (building up) and expansion (building out), particularly in the main urban areas, restricted land supply with implications for house prices and rents.

The group’s chairman Dominick Stephens , who is also chief economic adviser at the Treasury, says factors such as population growth and construction costs played a more modest role in the market.

“The global decline in interest rates inevitably led to a sustained reduction in borrowing, increasing demand to buy houses,” he says.

“If land supply had been more responsive this would have sparked bigger housing supply, moderating any initial lift in house prices and putting downward pressure on rents. Instead, restrictions to land supply meant that much of the fall in interest rates was capitalised into, or captured by, higher urban land prices.”

The report says a “burdensome” regulatory environment in Hamilton city, along with urban intensification constraints had significant implications on both house prices and rents during the two decades.

In the Waikato region, house prices went up by 372% between March 2002 and June 2021, with rents up 114%. Section prices in the Waikato climbed 405%, but 658% in Hamilton city. During that period incomes increased 98%, while national construction inflation rose 142%.

Stephens says higher urban land prices led to higher house prices without increasing the incentive to build dwellings.

The report also noted that when land supply is restricted, changes to the tax system will tend to affect the value of urban land rather than affecting dwelling supply or rents.

He says the group regards the supply of dwelling as important for housing costs, but that’s a “less prominent” driver of prices, but an important determinant of rents.

“Until recently rents had moved broadly in line with and even slower than incomes over a long period.

“But since 2015, rents have increased sharply across the Hamilton region as the population has grown faster than the supply of houses.

“The worsening availability and affordability of rentals have increased financial stress and homelessness,” he says.

Stephens says the three agencies are committed to better understanding the interlinkages between the economy, government policy, monetary policy and the housing market, with a particular focus on social wellbeing.

He says while the paper contained an assessment of what has happened, a lot is changing. “Urban planning is being reformed to free up land supply and tax settings have been changed for investors.”