Two countries, 16 cities - but only one housing market?

New research shows how closely the property markets in Australian and New Zealand cities may be linked.

When it comes to what influences housing markets in New Zealand and Australia, we're all in it together.

Kiwi and Aussie house prices are primarily being driven by precisely the same forces, rather than by one-off local factors.

Factors which influence cities - such as short-term immigration trends - might have a sharp short-term effect but are evened out over time.

That is the conclusion of a new housing study released this morning from Ryan Greenaway-McGrevy, Arthur Grimes and Mark Holmes of Motu Economic and Public Policy Research.

They examined eight main cities in each of Australia and New Zealand: Sydney, Melbourne, Brisbane, Perth, Adelaide, Hobart, Darwin, Canberra, Auckland, Wellington, Christchurch, Hamilton, Tauranga, Dunedin, Napier-Hastings and Palmerston North.

There was an equal balance of Australian and New Zealand cities to ensure that the results are not biased towards one country and the research was funded by New Zealand's Ministry of Business, Innovation and Employment as part of its resilient futures programme.
A commentary which accompanied the study's release said: "Kiwis often talk about the Auckland housing market as if it were a lone wolf, unconnected to anything else in the country. Now, however, economic research shows that not only is Auckland part of New Zealand but, when it comes to housing, we're all in it together with Australia."

The study reached firm conclusions.

"Our results demonstrate that there is just one aggregate source of shock that drives the non-stationary (i.e. permanent) trend component of all sixteen cities across the two countries. All other idiosyncratic shocks to city prices are stationary (i.e. temporary) and so their effects wither in the long run," the study found.

"Our results demonstrate a weak form of a single housing market. This means that house prices in cities across Australasia will diverge over time, but are influenced by the same long-term factors. These differences may be caused by differences in house price responses to land prices, migration responses to house prices or to land price responses to migration flows. The latter may reflect either geographical or planning constraints. These constraints may affect how much land is available and therefore how land prices respond to population flows (i.e. to migration).

"Our findings also have implications for macroeconomic policy. We find little evidence that the countries' independent monetary and/or other macro-economic policies have been instrumental in determining long run real house price outcomes in either country."

"In interpreting this finding, recall that our focus is on real house prices, a relative price variable. The implication that monetary policy has been ineffective in controlling this relative price variable is consistent with standard monetary theory, i.e. with the classical dichotomy," it found.

Read the full report here: