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Title:New Zealand's love affair with houses and cars PDF Logo
Authors:Khaled, Mohammed
Lattimore, Ralph
Issue Date:2005
Series/Report no.:New Zealand Trade Consortium Working Paper 41
Abstract:Twice in the last decade there have been surges in the demand for property in New Zealand - what could be described as speculative bubbles. An important part of these demands has been that for owner occupied housing. This has occurred in a generally buoyant economic environment since the early 1990’s as the economy finally recovered from the reform shock of the period 1985-91. In both cases, the central bank has raised interest rates in attempts to stem this exuberance. The housing market itself has been examined in two recent papers, Grimes and Aitken (2004) and Rosborough (2005). They explore drivers within the housing market at the national and regional levels. An earlier household demand system study by Michelini (1999) excluded housing (other than housing operations) essentially because of its capital nature and the lumpy transactions involved. A notable feature of the period has been an apparent drift away from owner occupied housing towards rental accommodation. This has been characterised as an affordability issue in the face of rapidly rising house prices. However, there have also been changes in government housing policy with a move away from state provision towards rental house subsidies for qualifying people (means tested portable housing supplements). This policy change is likely to have driven rents upwards and caused some substitution away from rental accommodation. More generally, there may have been a number of expenditure switches by households occurring over the last decade, so it is interesting to explore consumer expenditure patterns generally in an attempt to uncover any changes in demand parameters and preferences that may have occurred recently. This paper addresses this last issue with particular reference to the household demand for housing using household expenditure data (HES) up to 2004. As supply of housing, even that in the fairly long run, is essentially fixed (Grimes and Aitken, 2004), housing prices and the allocation of the existing stock are determined initially by demand conditions. Good estimates of housing demand elasticities will therefore be very useful in understanding variations in housing demands. Housing presents an interesting case because housing represents both a consumption good and a capital good. The purchase of houses for both own use and for rent can, accordingly, be thought of as having two income streams - an explicit or implicit rental stream and a stream of capital gains. The capital gains portion is attractive in New Zealand because, where the owner is not seen to be a property trader, it is not subject to income tax.
Document Type:Working Paper
Appears in Collections:New Zealand Trade Consortium Working Papers, NZIER

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