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Dissertation (1.566Mb) Determinants and Dynamics of New Zealand Housing Prices: National- and Regional- Level Analyses Olga Koveshnikova A dissertation submitted to Auckland University of Technology in partial fulfilment of the requirements for the degree of Master of Business (MBus) 2017 School of Business Auckland University of Technology ABSTRACT In this study we set out to find if macroeconomic factors have any strong association with house prices in New Zealand. To conduct our empirical analysis, we used a unique dataset with Residential Property Prices Indices with monthly frequency from SIRCA. The data sample spans 13 years from December 2003 to January 2017. Long run (cointegration) relationships and short run (error correction) relationships are estimated across 14 regions within New Zealand. The results of our empirical study indicate that house prices at both national and regional level between 2003 and 2017 are positively determined by household income in the long run. The impact of mortgage rate on housing indices is different for before and after crises subperiods: positive influence before and negative after crisis. In short- term relationships between changes in residential property price indices and their determinants at national level indicate that household income and population growth positively influence property prices, while mortgage rate increases lead to a decrease in house prices. Regions exhibit different short run behaviours across New Zealand in the responsiveness to the economic and demographic indicators change. We also analyse whether the movement of price in Auckland spillover to the neighbour Auckland cities and the other main cities of New Zealand. To do that, we estimate multivariate VAR models and then conduct a Granger causality test, impulse response functions and Variance Decomposition. Results suggest that the neighbouring Auckland cities are highly affected by the price trends and shocks in Auckland. When we consider the system of three main cities, we find that the price movement in Auckland shows substantial independence, while it can be useful in explaining the housing prices in Wellington and Hamilton. Additionally, we find that the movement of prices in Wellington and Auckland spillover to Hamilton. Keywords: House prices, Residential Property Price Index, Spillover, Error Correction model, Granger Causality, Impulse response functions, Variance Decomposition ii TABLE OF CONTENTS ABSTRACT ...................................................................................................................... ii LIST OF FIGURES .......................................................................................................... v LIST OF TABLES ........................................................................................................... vi ATTESTATION OF AUTHORSHIP ............................................................................. vii ACKNOWLEDGEMENTS ........................................................................................... viii CHAPTER 1: INTRODUCTION ..................................................................................... 1 CHAPTER 2: LITERATURE REVIEW .......................................................................... 4 2.1 Long-term determinants and short-term factors ...................................................... 4 2.2 Strong link between economic performance and house prices at national and regional level: Gross Regional Products (GRPs) have a significant positive effect and unemployment has a significant negative effect ........................................................... 5 2.3 Rising incomes and increasing borrowing capacity of households have been pushing up housing demand .......................................................................................... 6 2.4 Migrant inflows have contributed to pressures on housing demand ....................... 6 2.5 Rising land prices and residential construction prices, together with slow housing supply response to rising housing demand, have led to a large house price increase ... 8 2.6 Interaction between housing supply and housing demand ...................................... 9 2.7 Speculative element to the investment demand for housing and Auckland spillover effect ............................................................................................................. 10 2.8 Conclusion and structure of study ......................................................................... 11 CHAPTER 3: DATA AND METHODOLOGY............................................................. 13 3.1 Data ....................................................................................................................... 13 3.2 Empirical Models .................................................................................................. 23 3.2.1 The Error Correction Model .......................................................................... 24 3.2.2 The Vector Autoregressive Model .................................................................. 25 3.3 The Hypotheses ..................................................................................................... 27 CHAPTER 4: EMPIRICAL ANALYSIS AND RESULTS ........................................... 29 iii 4.1 The Error Correction Model Estimates ................................................................. 29 4.1.1 The Long-Run Relationship Results ............................................................... 29 4.1.2 The Short Run Dynamic Results ..................................................................... 33 4.2 The Spillover Effect Estimates.............................................................................. 40 4.2.1 Auckland Region (Auckland, Manukau, North Shore, Waitakere) ................ 40 4.2.2 Main Cities (Auckland, Hamilton, Wellington).............................................. 47 CHAPTER 5: CONCLUSION ........................................................................................ 51 REFERENCES ................................................................................................................ 55 APPENDIX 1: RC/TLA Correspondence and Name Definitions .................................. 59 iv LIST OF FIGURES Figure 1 Schematic Representation of Interaction between Housing Determinants and Housing Market Variables. ............................................................................................... 9 Figure 2 National Residential Property Price Index (baseline index 1000 = M12-2003) ......................................................................................................................................... 13 Figure 3 Regional Residential Property Price Index (baseline index 1000 = M12-2003) ......................................................................................................................................... 13 Figure 4 Residential Property Price Index in the Main Centres (baseline index 1000 = M12-2003) ...................................................................................................................... 14 Figure 5 Residential Property Price Index of Territorial Authorities in the Auckland Metro Area (baseline index 1000 = M12-2003) ............................................................. 15 Figure 6. National Average Household Income and Residential Property Price Index .. 16 Figure 7. Regional Average Household Income ............................................................. 16 Figure 8 National Residential Property Price Index and 2 Year Fixed Mortgage Interest Rate ................................................................................................................................. 17 Figure 9 National Residential Property Price Index and Net Permanent & Long-Term Migration ......................................................................................................................... 18 Figure 10 Regional Net Permanent & Long-Term Migration ........................................ 18 Figure 11 Annual Regional Estimated Resident Population for 30 June 2016 ............... 19 Figure 12 Regional Net Migration Rate .......................................................................... 20 Figure 13 Generalised Impulse Response Functions of RPPIs of Territorial Authorities in the Auckland Metro Area ............................................................................................ 43 Figure 14 Variance Decomposition of RPPIs. ................................................................ 46 Figure 15 Generalised Impulse Response Functions of RPPIs of the Main Centres ...... 49 Figure 16 Variance Decomposition of RPPIs ................................................................. 50 v LIST OF TABLES Table 1 Data Definitions – Raw Series ........................................................................... 15 Table 2 Summary Statistics of the Data Series at the National Level ............................ 21 Table 3 Model Summary with Variance Inflation Factors.............................................. 22 Table 4 Augmented Dickey Fuller Tests ........................................................................ 23 Table 5 Long Run Equations for the Full Sample .......................................................... 32 Table 6 Long Run Equations for the Period before Crisis .............................................. 32 Table 7 Long Run Equations for the Period after Crisis ................................................
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