Controlling house price affordability: Look to the rental market

Abstract

House price affordability has plummeted in many economies in spite of the belief in and use of monetary policies to control house price growth. This article examines quarterly data for New Zealand from Jan 2000 to April 2018 and illustrates that changes in mortgage rates had no recognisable effect on house price affordability. Instead we reveal a strong intertemporal and bidirectional relationship between affordability in the house rental market and affordability in the house ownership market. Increases in house price affordability do subsequently affect rental affordability but the relationship appears to be stronger the other way around, where house rental affordability subsequently affects house price affordability. When we control for seasonality we find that house rental affordability subsequently affects house price affordability albeit after a 1-year delay and the reverse causality disappears. Policies to control house price inflation should look at influencing the rental prices in the housing market rather than mortgage rates.