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How does monetary policy affect the New Zealand housing market through the credit channel?

Meltem Chadwick and Aynaz Nahavandi

Housing matters- the big picture:

House prices in New Zealand are driven by a wide range of factors – interest rates are just one part of the big picture.

A global decline in interest rates and strong population growth in New Zealand has had an outsized impact on house prices because the supply of new homes has been slow to respond. This includes both opening up new land and building new homes.

Tax rules in NZ favour housing against other investments. House prices are influenced by employment and incomes, as well as bank lending rules and the availability of mortgages.

House prices were boosted by falling interest rates around the world in the past decade (post GFC).

The Reserve Bank of NZ moves short-term interest rates to keep inflation low and stable and support employment at its maximum sustainable level.

We consider the impact of our interest rate changes on house prices and how they affect the Government policy for sustainable house prices.

We do not aim to drive house prices up or to stop them falling.

The factors affecting house prices have changed. Building consents are now high, population growth has slowed dramatically, interest rates are rising and we are seeing house prices cool down in 2022, after a rapid rise last year.

We are carrying out a wide range of research to understand the key drivers of house prices. We need to be clear about what the Reserve Bank can and cannot do and what others could do to fix this problem, which has been many decades in the making.

Key findings of Analytical Note

  • We analyse the effect of a monetary policy shock on household credit and real house prices in New Zealand through one of the channels of transmission, the credit channel.
  • We confirm that monetary policy stimulus triggers moderate house price movements in New Zealand.
  • We find out that an unanticipated increase in policy rate reduces real house prices by up to -1.6% and the growth rate of residential loans by -0.6% after 2.5 years.