Bulletin

An online magazine of news and opinions from the Asia New Zealand Foundation

The migration roller coaster and house prices

By Jacques Poot, professor of population economics at the National Institute of Demographic and Economic Analysis, University of Waikato

Immigration is once again headline news. Statistics New Zealand’s monthly release on international arrivals and departures is eagerly awaited by many commentators as an indicator of how well the economy is doing.

When the number of people moving to New Zealand rises, and the number declaring an intention to leave declines, it’s surely a sign that at least some parts of the economy are doing well.  In the year ending May, net permanent and long-term migration of 36,400 was the highest it’s been since the highest-ever net gain in 2003 (over the corresponding period).

If this indicates people “voting with their feet”, then surely this should be good news.  But a buoyant economy brings with it rising prices. The increase in house prices, particularly in Auckland, has been of great concern.

Census statistics show that the proportion of people owning a home has been declining – from 74 percent in 1991 to 65 percent in 2013. Given that net migration of 36,400 would push up the demand for housing by at least 12,000 dwellings, it’s not surprising that many suspect that migration is a major contributor to house price inflation.

If it were, and migration could be carefully controlled somehow, it would make sense to lower this pressure on a housing supply already having a difficult time meeting demand.  

However, this is not a new issue. Up until the 1970s, New Zealand economists worried that in the highly regulated and protected economy of those days, immigrants pushed up demand more than they contributed to supply (through their own employment), leading to inflationary pressures. Some might argue that with one out of four of the population born overseas, this must be an even bigger issue now.

In fact, the opposite is true, and part of this is due to demographics. Net migration should be gauged relative to population size. When you calculate a net migration rate (per 1,000 people), population change has been just as volatile throughout the last century as it is at present. 

Graph showing net migration figures for New Zealand - from 1900-2014. The graph shows that, per 1,000 population, net migration figures have had many peaks and troughs since 1900

The graph is best interpreted as an, admittedly imperfect, barometer of the New Zealand economy, with large migration rates meaning economic boom and low/negative rates meaning recession.  So if a business cycle roller coaster is undesirable, could restricting inward migration help when the economy is running hot?

Though this makes sense in theory, such a policy would be very hard to implement. Firstly, turning points in business cycles are notoriously hard to forecast and migration policies tend to have delays in implementation that would reduce their effectiveness.

 More importantly, it’s easy to show that the volatility in the graph above is not due to immigration policy, but to New Zealanders themselves moving overseas. This is strikingly clear from the graph below (starting in 1979 due to ease of data availability).

Graph showing net permanent and long-term migration figures for New Zealand for 1979-2014. Inward migration has been trending upward, with a peak in the 1990s, while outward migration by New Zealand citizens has been in the negatives since 1979

To date, net migration by New Zealand citizens (in black) has always been negative. More New Zealanders leave than return from abroad.

Net recruitment of citizens from the rest of the world (in green) shows a clear upward trend. But except for the peaks in 1996 and 2003, this migration is modest.

This brings us then back to the housing market. If we translate these net migration rates into demand for dwellings, it becomes clear that New Zealanders’ mobility is far more responsible for market volatility than immigration. A policy-induced reduction in the upward trend in the green line will have no effect on the ups and downs of the black line.

These statistics are consistent with research that has been done on the impact of net migration on the housing market.  When you link the first graph with data on house prices, some econometric modelling suggests that there is quite a strong impact at the national level. One percent population growth through net migration might then be seen to increase house prices by about eight percent.

But research that takes a more micro approach (looking at regions and the kinds of people demanding housing) has found that New Zealanders returning from abroad had more of an impact on house prices than the new immigrants.

Finally, international research measuring the causal effect of large and unexpected increases in migration suggests that a net migration “shock” of one percent may add at most 1 percent to house prices.  

In that case, the boost in net inward migration since 2011 (when the outflow of New Zealanders to Australia was of great concern) would have added at most 0.8 percent to house prices over three years – hardly alarming.

Housing market observers should be far more concerned with the infatuation with housing as a financial asset, speculative volatility in prices and the difficulty councils, developers and construction firms have in meeting increases in demand.

July 2014