CONCLUSIONS

New Zealand's large and volatile external migration flows generate significant year-to-year fluctuations in the demand for residential housing. This paper uses 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. Our analysis focuses on the relationship between the changes in the population 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.

We find that areas with relatively high population growth over a five-year period also tend to experience relatively rapid appreciation in house prices. A one percent increase in the population of a local area is associated with that area having house and flat sales prices and weekly rents that are between 0.2 and 0.5 percent higher. Although international migration flows are an important contributor to population fluctuations, we find no evidence that the inflow of foreign-born immigrants to an area are positively related to local house prices, despite there being a strong correlation over time at the national level. On the other hand, there is a strong positive relationship between inflows of New Zealanders previously living abroad into an area and the appreciation of local housing prices, with a one percent increase in population resulting from higher inflows of returning Kiwis associated with a 6 to 9 percent increase in house prices. These findings remain when we use instrumental variables estimation to control for the fact that individuals may choose locations partly on the basis of expected house price growth.

We also examine the relationship between population changes and neighbourhood housing prices controlling for the fact that different aggregate areas in New Zealand are more or less attractive to different individuals and have higher or lower house prices. Reinforcing our main results, we find that neighbourhoods which experience relatively high population growth from returning New Zealanders have greater house price increases than the rest of their labour market area and that neighbourhoods with relatively larger inflows of foreign-born immigrants experienced slower house price growth relative to the labour market area in general.

These overall relationships are not, however, robust across different time periods, suggesting that population growth is not the dominant determinant of house price changes and that there are omitted or mediating factors that may be more important than population change per se in determining house prices. Further consideration is warranted of cyclical influences at the aggregate or LMA level. Unfortunately, the five-yearly frequency of our data means it not ideally suited for analysis along this dimension.

Previous studies that examine housing markets in the United States have found that immigrant inflows lead to higher local house prices. It is difficult to know why the impacts of immigrant inflows on housing markets differ in New Zealand, although consistent with these results, recent work by Maré and Stillman (2007) finds that immigrant inflows to NZ also have small impacts on the labour market. Card (2007) argues that if immigrants raise the productivity and wages of native workers, spatial sorting leads to rents being bid up by incoming workers entering to take advantage of the spillovers. Taken together, the results in this paper and Maré and Stillman (2007) are consistent with there being weaker labour market spillovers in NZ than in the US.

Our overall results raise doubts about whether the strong positive correlation that exists between immigration and house price appreciation over time at the national level is in fact causal, given the lack of a similar relationship at different spatial scales, controling for aggregate trends. This suggests that the relationship at the national level may be a consequence of omitted aggregate time series factors that raise both immigration and house prices. However, our estimates could understate the impact of immigration on house prices if local house prices are affected by population changes in all areas, as part of a process of spatial equilibration. The fact that we find a positive relationship between local overall population change and local house prices and differential impacts of returning New Zealanders and new immigrants, and that our findings are consistent across different definitions of local areas, suggests that the methodology used in this paper (and in previous studies on the impact of immigration on the US housing market) provides valid estimates of the causal impact of immigration on house prices in New Zealand.

There are a number of dimensions along which our current research can be extended, some of which we plan to consider in future work. First, it would be useful to incorporate information about supply-side constraints in different housing markets so we can see whether the transmission of housing demand into price increases is linked to these local conditions (cf: Capozza et al (2002)). If there is a causal relationship between different components of population change and house prices, the impacts will be larger if immigrants and/or returning New Zealanders locate in areas where housing supply is relatively inelastic. Second, we can look more deeply at the sorting of different groups of individuals into different neighbourhoods, both to examine whether immigrants settle into areas with more elastic housing supply and to examine the extent to which New Zealanders leave neighbourhoods in which immigrants are settling (cf: Saiz and Wachter (2006)). Third, since it is quite likely that the impact of population change may be asymmetric since once homes are built they general remain part of the housing stock for the long-term, we could examine whether the impacts of population changes on house prices differ when the population is increasing compared with when it is declining (cf: Grimes et al (2004)). Fourth, we can attempt to quantify the extent to which local population changes spillover to house prices in different areas of New Zealand.