DESCRIPTIVE EVIDENCE

In this section, we summarise the relationship between population changes and house price changes. We show the time series relationship at the aggregate level, and investigate whether different components of population change are related to house price changes in the same way. We then consider the patterns within each of 140 local labour markets, which allows us to disaggregate the link between population and house price changes, and examine the stability of patterns across sub-periods.

Figure 1 from Coleman and Landon-Lane (2007) shows the strong time-series relationship in New Zealand between net migration and real house price inflation.^[15] The authors report that the contemporaneous correlation between these series is 0.55 and that a 1 percent increase in population due to net migration is associated with a 7.8 percent increase in house prices. The top row of Figure 2 summarises the aggregate time series relationships at 5-year intervals using Census and QVNZ data. The first graph is a scatter plot of aggregate data for each of the four intercensal periods (1986-91, 1991-96, 1996-2001, 2001-2006). As in the higher frequency time series data in Figure 1, the relationship is strong and positive. A one percent increase in population over five years is associated with a 12.6 percent increase in house prices.

The second and third graphs then disaggregate the overall population change into the change in the number of New Zealanders and the change in the number of immigrants, both as a proportion of the overall population five-years earlier. The changing number of immigrants is dominated by inflows of New Immigrant, but also includes the net change in the number of Previous Immigrants. The relationship between changes in the immigrant population and house prices is even stronger than the relationship with overall changes in population. A one percent increase in the population from changing numbers of immigrants is associated with a 13.7 percent increase in house prices. In contrast, a net change in population due to the changing number of New Zealanders is negatively associated with house price change (elasticity of −4.4).

These differences do not necessarily imply that immigration leads to higher house prices. This positive relationship may result from the fact that immigrants locate disproportionately in areas with higher house prices (as shown in Table 4), in areas with higher general house price appreciation, which Table 4 suggests is not the case, or are more likely to come to New Zealand when the country is doing well and overall house prices are increasing. When immigrants choose to live in high-price areas or move to New Zealand when overall house prices are increasing, average house prices will rise during periods of high immigration because the high-price areas will receive more weight, even if immigrants do not have a causal impact on house prices. A fuller picture is provided by examining the relationship between changes in population and changes in house prices in different local areas.

The graphs in the second row of Figure 2 plot the relationship between local population change and local house price change, for each of 140 LMAs in each census year. The size of each marker is proportional to the average current population and population five years prior in each LMA and the solid line is the best population weighted linear fit of the data. Changes in population and house prices are positively correlated across LMA-year observations although the relationship is much weaker than in the aggregate data (elasticity of 1.3). There is also a positive relationship between changes in the NZ-born population and house prices changes across LMAs (elasticity of 0.4), as areas with higher NZ-born population growth have higher house price appreciation and this effect dominates the negative association in the aggregate data.

The final row of Figure 2 plots the relationship between local population change and local house price growth in each LMA relative to the aggregate changes in each intercensal period, and thus shows whether areas that have population growth that is higher than the national growth rate also have house price appreciation that is higher than the national rate of appreciation. Controlling for aggregate time effects in this way, there is still a positive relationship between population growth and house price growth (elasticity of 0.3). However, this positive effect is now attributed entirely to changes in the NZ-born population (elasticity of 0.7), with a weak negative relationship between immigrant change and house price change (elasticity of -0.3). These results indicate that while overall net immigrant inflows are larger in periods when house price inflation is higher, house price appreciation is not higher in areas where the immigrants locate relative to other areas in the country. In contrast, overall net inflows of the NZ-born are lower in periods of house price appreciation, but local house prices appreciate more in the areas where New Zealanders locate.

Figure 3 separately shows the patterns for each of the four intercensal periods, which are superimposed in the final row of Figure 2. The 2001-2006 period is strikingly different from the others. Both overall house price appreciation and overall population increases were stronger in 2001-2006 than in other periods, but the areas with the largest population increases in 2001-2006 tended to experience smaller increases in house prices. As is evident from the size of the circles in Figure 3, the largest LMAs, which are Auckland and South Auckland, consistently have disproportionately large increases in population due to immigration. In 1991-1996, and to a lesser extent in 1986-1991, house prices grew relatively rapidly in these LMAs. However, in the later two periods, the Auckland LMAs had lower than average house price growth.

While the results presented in Figure 2 suggest that local population changes, in particular those arising from immigration, are not directly related to changes in local house prices, Figure 3 casts doubt on the stability of the relationship between population growth and house price appreciation over time and on our ability to draw conclusions that apply in all time-periods. However, the raw relationships described in these figures do not control fully for heterogeneity in the different population groups that live in different areas in New Zealand or for the fact that people who change locations may self-select into growth areas where house prices are appreciating. To control for such factors, we undertake more sophisticated multivariate analysis, to which we now turn.