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Measures for Assessing the sustainability of house prices in New Zealand

Matthew Brunton

As kaitiaki (guardian) of the financial system, the Reserve Bank of New Zealand – Te Pūtea Matua has a key role in maintaining financial stability. When risks from the housing market build, we may need to intervene, through our macroprudential tools such as loan-to-value ratio (LVR) restrictions, to help build the resilience of households and their lenders, and to support the stability of the financial system.

House prices in New Zealand have experienced historically exceptional levels of growth over the past year, leading to concerns that risks are building in the housing market. The Minister of Finance also issued a direction for us to have regard to the impact of financial policy on the Government’s housing objective of supporting more sustainable house prices.

A key challenge is that the sustainable level of house prices is not easy to measure and is influenced by many drivers. This Note describes a range of metrics that can be used as indicators of whether current prices have deviated from sustainable levels. This builds on literature where the value of houses is estimated using user-cost models. Research on understanding sustainable house prices is ongoing and this framework will be refined further over time.