The recent strongly surging migrant inflow could increase house prices by around 7%, and increase the number of monthly building permits by around 150 next year, according to Reserve Bank analysis.
An analytical note "Migration and the housing market" by Chris McDonald features modelling that looks at monthly data between 1990 and this year to assess the impacts of migration on the housing market.
"With regards to the 2013 migrant inflow, house prices will almost certainly face upward pressure, some of which will probably already have been seen," McDonald said.
"...All in all, although there is uncertainty around the estimates, the recent migrant inflow could increase house prices by around 7%, and increase the number of monthly building permits by around 150 next year."
McDonald's analysis used a "small model" estimated on observed historic data for migration, house prices, residential building consents, the estimated output gap and mortgage interest rates. "Readers should keep in mind that migration is likely to be affected by many factors that have not been controlled for."
Recent migration statistics for October showed that in that month New Zealand had a seasonally-adjusted net inflow of 3000 migrants, which was the most in 10 years.
McDonald said that net migration changes are consistent with large housing effects.
"An additional net inflow that adds 1% to the population causes an 8% increase in house prices over the following three years and an additional house is built for around every six migrants. This is materially more than the existing number of people per household in New Zealand (around 2.5)."
He said that when net migration is split into arrivals and departures, arrivals appear to have had bigger house price effects than departures.
Also, the origin of foreign arrivals also appears to have mattered.
"A 1000-person increase in monthly European/UK arrivals raises real house prices by 8% after two years, whereas a 1000-person increase in monthly Asian arrivals raises real house prices by around 6%," McDonald said.
In explaining this, McDonald said that people who come to New Zealand can be diverse.
"People arriving from Asia (often from countries with much lower incomes than New Zealand) are likely to be quite different in terms of wealth and housing preferences to people coming from Europe.
"As such, they might have different effects on the housing market."
Biggest migration gains
In the year to October the biggest net migration gains came from the UK (5900), China (5500) and India (5200).
McDonald said a 1000-person increase in monthly European/UK arrivals, as well as the 8% rise in house prices after two years, results in over 200 new consents each month and raises the 2-year fixed mortgage rate by more than 50 basis points.
"A similar-sized increase in arrivals from Asia has more gradual effects. It typically increases house prices by around 6% over five years and building consents by 200 per month."
McDonald said the strong relationship between migration and the housing market was not necessarily the result of migration itself.
"Factors that are not included in the model may be causing house prices to increase at the same time as migration. The main thing missing from the models is international factors (for example, the performance of the Australian economy), which at times probably do affect both migration to/from New Zealand and local house prices.
Unexplained international factors
"As such, the strong association that is identified could be, as least in part, reflecting unexplained international factors. This strong relationship could also arise because migration shocks affect households’ expectations of future house prices.
"For example, after an inflow of migrants house prices might increase by, say, 1% or 2%. Home owners observe higher house prices, feel wealthier and decide to buy another property. Alternatively, other buyers might observe house price inflation and adjust their expectations of how much they are willing to pay.
"Either way, house prices could rise by more than the direct impact of migration on house prices. Whatever the reason, migration remains an exceptionally good indicator of future movements in the housing market."
The "unexpected" increase in net immigration in 2013 was "consistent with real house prices increasing by 10%", McDonald said.
"However, much of this increase in net migration was due to a fall in departures, and previous results have shown that departures are associated with smaller effects."
'Might not increase as much'
Once different migration effects were accounted for, house prices might not increase by as much.
"When splitting arrivals and departures, the peak house price effect is around 8% and when splitting net arrivals by citizenship the peak house price effect is around 7%."
McDonald said whether or not the strong relationship between migration and house prices was due to migration itself or through some other factor, the relationship was useful for forecasting.
"The increased 2013 migrant inflow will almost certainly put some upward pressure on both house prices and building activity over the next year or two.
"Based on past experiences, those effects could be smaller than otherwise because most of the [current] change in net migration is resulting from the choices of New Zealand citizens rather than from an additional inflow of foreign citizens."
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.