Surging house prices over the past 20 years have been driven by low interest rates, a shortage of land, and favourable tax rules, according to a report by three government agencies.
The study looked at house prices in Hamilton and Waikato. (File image) Photo: RNZ / Nate McKinnon
A joint paper from Treasury, the Reserve Bank of New Zealand, and Ministry of Housing and Urban Development, has discounted rising building costs and migration as key reasons for the surge in prices.
The study looked at house prices in Hamilton and Waikato over two decades, but have applied the findings nationally, and suggested common held views that rising building costs and population growth, including migration, were secondary reasons for the near four-fold increase in prices over the two decades.
"The key conclusion is that a combination of a global fall in interest rates, the tax system, and restrictions on the supply of land for urban use were the main cause of higher house prices in Aotearoa New Zealand over the past 20 years," said Treasury deputy secretary and chair of the housing working group, deputy, Dominick Stephens.
It said the global fall in interest rates made it cheaper to borrow to buy houses, thus lifting demand, but a lack of suitable housing land also lifted prices and was added in to house prices because there was less incentive to build new houses rather than pursue existing ones.
The report said the shortage of land was exacerbated by restrictive planning rules which limited the ability to intensify through taller buildings or to expand in to new areas.
"Evidence supporting our conclusions includes the fact that prices rose much further than rents, that the price of land rose much further than the cost of constructing new dwellings, and direct indications of restricted land supply."
For the Waikato region, house prices went up by 372 percent during the 20 years, section prices by 405 percent in the region and by 658 percent in Hamilton City.
In contrast rents rose by 114 percent, incomes increased 98 percent, and building costs rose 142 percent.
The report highlighted various tax distortions which added to higher prices, including untaxed imputed rent - the rent owner-occupiers effectively pay themselves - while other types of income from investments are taxed; capital gains not being taxed, and other inconsistencies.
"Both the first and the second distortions also increase the investment value of housing relative to other investments.
"Devoting resources to owner-occupied housing yields untaxed shelter in perpetuity as well as untaxed capital gain, whereas saving money in the bank or investing in one's education will yield a taxed stream of future income."
It said the housing market developments had made it more difficult for first home buyers to enter the market, while adding significant pressure to vulnerable lower income groups.
"The increase in rents since 2015 is likely to have had a larger negative impact for the wellbeing of society's most vulnerable members than the large increase in house prices."
"This further emphasises the importance of our conclusion that, had land supply been more flexible, the large decline in interest rates would have resulted in rents and house prices being lower."
Stephens said conditions and rules were changing, such as tax rules for investors, moves to free up planning laws to allow more land for housing and increase urban density.