BACKGROUND

New Zealand's current immigration policy admits, on average, an inflow of roughly 1 percent of the overall population each year. In addition, there is a sizeable unrestricted inflow that includes Australians and, predominantly, returning New Zealanders. New Zealand also has a high emigration rate of both locally born individuals and previous migrants. These movements of people result in large changes in the overall population in short periods of time. For example, between 2001 and 2006, the adult population increased by 8 percent, with 93 percent of this increase coming from the inflow of new migrants, 29 percent from the return migration of New Zealanders, −22 percent from demographic change and the emigration of previous migrants and −1 percent from demographic change and the emigration of New Zealanders. Unlike in many other countries, foreign immigrants to New Zealand have higher levels of qualifications than the general population. Consequently, immigration is expected to affect a broader segment of the housing market than in countries, such as the US, where immigrants are predominantly low-skilled. Returning New Zealanders are also relatively highly skilled and are especially likely to be homeowners as they are typically prime-aged and have higher average incomes than the general population.

The impact of local migration inflows on local house prices will depend on both the size and composition of migration flows to and the elasticity of housing supply in different across local housing markets. Inflows of foreign-born and New Zealand-born migrants from abroad or from elsewhere in New Zealand vary a great deal across local areas and different migrant groups may demand different quantities and types of housing or enter particular segments of the residential housing market - renting as opposed to owning. The short-run impact of unanticipated migration inflows into an area on the local housing market is to generate an increase in housing demand and an increase in house prices that depends on the elasticity of local housing supply.^[2] Supply elasticities may vary across areas for a variety of reasons. Glaeser et al (2005) point to three limits to supply that may cause demand shifts to lead to house price inflation-construction costs, increasing land prices, and regulatory barriers to new construction. Land scarcity or permanent barriers to new construction may justify permanently higher house prices when demand increases. In contrast, construction costs can be expected to decline as the rate of construction slows and the building industry expands. Relaxation of regulatory constraints will also lead to a reversal of house price increases.

Short-term increases in population may lead to sustained house price inflation if house price expectations are adaptive rather than forward looking, in which case recent trends are extrapolated into the future. There is some evidence that this is, in fact, the case, which leads to the possibility of house price bubbles and periods of sustained house price inflation. For example, Case and Shiller (1988), (1989), (2003) find that past information helps to predict future house price growth, which would not be the case in an efficient market. Similarly, Capozza et al (2002) find high serial correlation of house prices in metropolitan areas, especially in areas with high population growth, high construction costs, and high incomes. More pertinent for our research, Grimes et al (2004) find some evidence of short-term overshooting of the New Zealand housing market, although they conclude that there is nevertheless gradual convergence to long-run efficiency.

However, over time, the housing impact of migration flows into an area will also affect other areas, as population shares and relative house prices adjust to restore a spatial equilibrium in which people are once again indifferent about which area they locate in. Thus, spatial equilibration will serve to weaken the relationship between local migration and local house prices. We assume that this process of equilibration is only partial within the timeframes that we observe, in which case the relationship between local population change and local house price change still provides a meaningful indication of the impact of population movements on local housing markets.

A number of recent studies take a similar approach and examine the local impact of immigration on the housing market. This literature is dominated by studies that look at the impact on local rental prices in the US, reflecting the fact that predominantly low-skilled US immigrants tend to live in rented accommodation. In general, they find that immigration has a positive effect on rental prices. For example, Saiz (2003) examines the 1980 "Mariel boatlift" in which Cuban immigrants added 9 percent more individuals to Miami's renter population. He finds that rental prices increased by 8 percent, with smaller increases for top-end rental units, and a slight decline in house sales prices. Saiz (2007) examines annual and decennial immigration flows and rental price changes in metropolitan areas and finds a similar elasticity, with a 1 percent increase in population due to immigrants resulting in a 1 percent increase in rental prices. Ottaviano and Peri (2007) jointly estimate the impacts of immigrants on wages and rents and find slightly lower elasticities of 0.6 to 0.8 for rents, and 0.4 to 0.6 for wages. Greulich et al (2008) estimate a rent elasticity of 0.6, but no significant impact on the rent-to-income (rent-burden) ratio. As Card (2007) points out, the lack of an impact on the rent burden is consistent with a positive effect of immigrants on the wages of native workers - the higher wages attract additional workers, who bid up housing rents. This results in a new spatial equilibrium, with potential immigrants to an area again indifferent between their current location and the high-wage/high-rent combination in the area with a now larger population.