Determinants of House Prices in New Zealand

Abstract

Residential house prices in New Zealand (NZ) have experienced substantial increases even as the rate of house transactions began to slow down in 2007. This paper develops house price forecasting models using multiple regression analysis in order to analyse the main determinants of house prices in the New Zealand market. Quarterly time series data for the period from March 1980 to December 2007 were collected from the Department of Statistics and the Reserve Bank New Zealand for the model development. The estimated model suggests that house prices will fall after 2007 and will continue to fall in 2008 and 2009, and that migration plays an important role in determining house price fluctuation, so that a one-percent increase in migration arrivals is associated with approximately a 10 percent change in house prices with a one-year lag. Investment expectations, unemployment, mortgage rate and building permits are also the main determinants of price variations. The model shows that even before the sub-prime crisis hit NZ, the prices had been on the way down.