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Forecasting House Prices: DownToEarth disagrees with Treasury & Sir John Key. Let's see who wins.

The Treasury are forecasting house prices will start bouncing back to match their previous all-time high late in 2026, on the back of rising household incomes & falling interest rates. Sir John Key is also bullish on property, saying, "When we look at recessions we look at property at ANZ and there are only two things we worry about, do people have a job & how much are they paying for the money? .. Sir John said ultimately for the market to crash interest rates would have to skyrocket & the job market completely fall apart", which he considers unlikely.

Only thing is, urban economists would probably disagree with both of them. Why? Since interest rates have not been found to be a major determinant of house prices - but supply restrictions have been. On that note, NZ's new intensification rules now allow buildings of up to three storeys on most sites in cities throughout the country, without any need for resource consent, courtesy of the recently passed "Enabling Housing Supply Act".

One of the founders of urban economics, Prof. Ed Glaeser, who visited us a few years ago, wrote after the Global Financial Crisis that, "The financial aspects of housing were the focus of attention during the last cycle - and housing investors in Las Vegas during the boom mistakenly concentrated on low interest rates rather than the ease of building in that metropolitan area". In another article Ed writes, "The modest predicted impact of interest rates on prices is in line with empirical estimates & it suggests that lower real rates can explain only one-fifth of the rise in prices from 1996-2006" (in the US). Vegas house prices took 15 years to get back to previous levels after the GFC:

So my view is that jobs and interest rates are not the main act in town, and Treasury is wrong to argue house prices will quickly bounce back in NZ once rates start going down again. The main driver will be the radical easing of supply constraints that has been legislated, which will put downward pressure on house prices for a long time to come.



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