INTRODUCTION

New Zealand's large and volatile external migration flows generate significant year-to-year fluctuations in the demand for residential housing. Between 1986 and 2006, net permanent and long-term (PLT) migration into New Zealand added, on average, 0.1 percent annually to the New Zealand resident population, compared with a natural increase of 0.8 percent (from births minus deaths). However, in contrast to the relatively steady growth from the natural increase, net PLT migration flows fluctuated markedly. In 1986, PLT migration outflows roughly offset the natural increase, whereas in 1996, 2002, and 2003, they added more to New Zealand's population than the natural increase.^[1] These periods of high net inflows were also periods of high house price growth, a relationship that is clearly evident in Figure 1.

Recent research by Coleman and Landon-Lane (2007) on the links between migration and the New Zealand housing market estimates structural vector autoregressive (VAR) models at the national level for each of two periods: 1962-1982 and 1991-2006. They conclude that "a migration flow equal to 1 percent of the population is associated with an 8-12 percent change in house prices after a year, and a slightly larger effect after three years."(p. 43) They note that this estimate is an order of magnitude larger than is implied by the long-run relationship between house prices and net migration and suggest that housing supply constraints and the potential for migration flows to destabilise income expectations are possible reasons for the very strong time-series relationship. Similarly, Grimes et al (2007) analyse the dynamics of adjustment in regional labour and housing markets using a VAR model on a panel of regions from 1986 to 2006. They find that, at a national level, both house prices and migration rise strongly in response to increased employment. In contrast, a region-specific employment shock results in strong in-migration, but this is not associated with movement in relative house prices. Despite the conflicting local and national findings, it has become widely accepted in New Zealand that immigration has played a significant role in recent house price inflation, as typified by the Reserve Bank's December 2007 Monetary Policy Statement, in which they refer to "... a strong housing market fuelled by the combination of a sharp increase in immigration and an extended period of unusually low global interest rates." (Reserve Bank of New Zealand (2007)).

In this paper, we use population data from the 1986, 1991, 1996, 2001 and 2006 New Zealand Censuses, house sales price data from Quotable Value New Zealand and rent data from the Department of Building and Housing to examine how population change, international migration, including the return migration of New Zealanders abroad, and internal migration affect rents and sales prices of both apartments and houses in different housing markets in New Zealand. We focus particularly on local rather than national impacts, to abstract from the possible confounding influence of macroeconomic factors, and to gain a fuller understanding of the local interaction of migration and housing.

We begin our analysis by examining the relationship between changes in the population size in local areas and changes in house sale prices and rents in these areas. Focusing on changes allows us to control for time-invariant unobservable characteristics of local areas that either attract or repel individuals and lead to differential costs of housing. This is important because both population and housing market characteristics are likely to reflect unobserved characteristics of local areas (eg. local amenities, job opportunities, commuting costs) and unobserved characteristics of the housing stock in these areas (eg. the size and quality of local dwellings). We also control for changes over time in the observable characteristics of individuals living in different areas (eg. their age, employment status, income, household composition), which allows us to account for changes over time in the type of housing demanded by different individuals and in average dwelling sizes.

We next examine the impact that four key components of population change: new immigrants to New Zealand; New Zealanders returning from living abroad; net inflows of earlier migrants moving from other areas of New Zealand; and net inflows of New Zealanders moving from other areas of New Zealand, have on changes in house sale prices and rents in local areas. Internal and international migrants may be attracted to local areas with generally lower housing costs. If so, this endogenous response will bias downwards our estimate of the relationship between house prices and immigration. Alternatively, if migrants are attracted to areas with improving prospects and consequently with rising house prices, estimates of the causal impact of migration will be biased upwards. Thus, we subsequently use an instrumental variable technique to isolate components of local population change that are independent of local house prices.

In additional analyses, we examine the relationship between the components of population change for each area and different quantiles of the local house price distribution, estimate our main regression models over different sub-periods, and analyse the sorting of new immigrants to New Zealand and New Zealanders returning from living abroad into particular neighbourhoods within local areas. Mean house price changes may fail to capture the effect of population changes if changes in housing demand are focused in particular parts of the house price distribution. For example, returning New Zealanders have relatively high average incomes, suggesting that they may have a greater influence on the demand for higher-price housing. Examining the stability of our results over different sub-periods allows us to assess the robustness of our estimates, while focusing on the sorting of different individuals into particular neighbourhoods within local areas allows us to evaluate the impact of immigration on neighbourhood housing dynamics.