The Determinants of the New Zealand Housing Market and the Effects of Loan-to-Value Ratios

Abstract

Beginning in 2013, New Zealand rolled out a series of macroprudential policies in the form of three loan-to-value ratios, in response to over-heating in the housing market. The aim of these policies is to curb excessive growth in mortgage credit held by individuals and lending institutions, with the hope that house price growth may be slowed as a side-effect. This paper uses vector autoregression analysis to investigate the forces at work in the New Zealand housing market, specifically the determinants of price movements. It then uses these findings to estimate the effects of the recent loan-to-value ratio policies on the house prices in New Zealand. The results find that in the macroeconomy, the mortgage rate and net migration of both NZ and non-NZ citizens have a strong influence on the housing market, particularly on the number of sales, the house prices and household credit. The number of building consents are relatively unimportant in the market. Lastly this paper finds little to no statistical effect of the LVR policy on the house prices and household credit.