Interest Rates and Monetary Policy Interest rates and monetary policy significantly affect residential property capital values. The official cash rate (OCR), the rate at which banks borrow from The Reserve Bank, determines the level of interest rates. When the OCR increases as a result of monetary policy, interest rates are likely to go up, and vice versa. These movements have an impact on the housing market. An increase in interest rates usually means a higher cost of loans and reduced consumer confidence, consequently affecting house prices and sales. Similarly, a decrease in interest rates means a decrease in the cost of loans, improved consumer confidence, and reduced house prices.

Inflation

Residential property capital values are also affected by inflation – the general increase in prices. During periods of high inflation, there is usually increased investment in residential property. Consumers and firms with cash reserves or borrowing ability feel incentivized to invest in real estate and other assets that gain value during periods of high inflation. Nonetheless, high inflation often makes it hard to predict the future movement of inflation, thereby increasing uncertainty in the market. This may consequently impose pressure on real estate property, warranting the intervention of The Reserve Bank, which raises the OCR to increase interest rates and thus reduce inflation.

Supply and Demand

Supply and demand are inherent characteristics of a competitive market. In a competitive market, supply and demand forces influence prices. In the property market, there is direct (but not necessarily proportionate) association between market forces and demand and an inverse (but not necessarily proportionate) association between market forces and supply. This means that reduced housing supply due to a slowdown in the construction industry, for instance, will result in higher prices, though the increase will not be proportionate to the shortage. Equally, reduced housing demand will cause a decrease in property prices, but not proportionately with the reduction in demand.

Net Migration

Net migration influences residential property capital values by affecting population growth. As a result of increased population, the demand for housing goes up, consequently affecting yields and prices. The impact of net migration on property prices is especially significant in New Zealand, where the movement of net migration is generally positive every year. It should, however, be noted that the extent to which migration affects property capital values is dependent on the extent of gain or loss. For instance, the effect of a small gain is likely to be felt if factors such as unemployment and politics are already pressurizing the market.

Employment Trends

Employment trends are changing. Workforce ageing, an increasing immigrant workforce, increased employment in service industries, and changing job types and work ethics are now common phenomena, especially in New Zealand. These trends affect the housing market by influencing the level of mortgage sales. As the labor market becomes tighter, a significant portion of the workforce becomes redundant, leading to income losses. This consequently increases loan defaults and reduces consumer appetite for debt. However, property investors benefit during employment downturns as they acquire properties at better prices. When the labor market improves, consumers gain more appetite for debt, resulting in increased investment in property.

Task 2 (1.2)

Planning and Resource Regulation

All buildings...

RMA regulates land use, water consumption, the use of coastal space, and the discharge of contaminants into the environment (water, soil, and air). The Building Act regulates the construction, modification, destruction, and maintenance of new and existing buildings. These regulations may affect the property market by increasing bureaucracy in property development, subsequently slowing down construction processes. This can affect the supply side of the property market, thereby affecting capital values. In Auckland, for example, RMA reforms have led to an increase in capital values and prices.
Migration Policy

Immigration policy in New Zealand has shifted significantly over the years, with emphasis now being on merit and skills as opposed to race or nationality. This has increased migration to the country. Today, New Zealand is home to a considerable immigrant population. Increased migration affects the housing market by increasing population. For instance, immigrants from a certain country often settle in certain locations. Likewise, family members of immigrants prefer settling in similar locations. This growth in population increases the demand for housing in those locations, thereby affecting property values. On the contrary, an unfavorable immigration policy would reduce migration to New Zealand, consequently reducing population growth and housing demand.

Fiscal Policy

Changes in taxation and government expenditure can affect the housing market. They affect the housing market by influencing supply and demand. For instance, increased taxation will reduce disposable income, consequently diminishing the ability of consumers and businesses to service loans, and vice versa. This would mean increased or reduced demand for property. Government expenditure affects the housing market through infrastructural improvement. When the government invests more in infrastructure (e.g. transport systems, sewerage systems, electricity, and social amenities) property investors are incentivized to invest more in property, thereby increasing the supply of housing. Reduced government expenditure has the opposite effect.

Task 3 (1.3)

Tenant Types

There are three types of tenants: short term (periodic) tenants, long term (fixed) tenants, and company (service tenants). These tenants have some implications for the housing market. For instance, short term tenancies may increase rental income volatility, while long term tenancies may decrease rental income volatility. Additionally, service tenancies may be less preferable compared to long and short term tenancies.

Types of Property

There are several types of properties, ranging from standard residential houses and rural residential houses to attached townhouses and apartments. These property types influence capital values in large part due to the type of tenants each type attracts. For instance, a retired worker is likely to prefer a rural residential house, while a family with school-going children is likely to go for a suburban home. In essence, each type of property targets a particular segment of the population, thereby affecting demand and capital values.

Features of Location

Location significantly affects residential property capital values. Different geographic areas have different features and benefits, which affect house prices at any given time. For instance, locations with renowned social amenities such as schools are likely to have higher capital values. Additionally, locations…