Kiwi economist Rodney Dickens shares his take on the rising interest rates and how population growth continues to be a driver of residential building growth.
Traditionally, population growth and interest rates have been the two most important drivers of upturns and downturns in residential building. Other factors will have some impact, but over the next 12-18 months, I expect improving population growth and rising interest rates to be the main drivers of the level of residential building. This raises the question of which matters most.
Population growth has started to improve, driven by fewer Kiwis leaving the country and more immigrants arriving. New Zealand economic growth is improving, relative to Australian growth, which should help boost immigration and reduce emigration. The reduction in emigration is being helped by the high level of Kiwis having left over the last three years, resulting in a declining pool of people considering leaving.
As shown in the first chart, in the 1970s and 1980s there was quite a close link between the annual change in the population and the annual number of new dwelling consents. The best fit is with population growth advanced or leading by five quarters. Back then, the Reserve Bank wasn’t marching interest rates up the hill just to march them down again. Allowing for the five-quarter lagged impact, improving population growth will become a positive for the level of residential building next year.
After gaining independence to operate monetary policy in 1990, interest rate cycles became much more volatile, and they became the main driver of upturns and downturns in new dwelling consents. This is shown in the second chart, in which the average mortgage rate offered by the major banks is advanced or shifted to the right by 13 months. Upturns in the seasonally adjusted monthly number of consents generally follow falling mortgage rates by around 13 months and falls in consents follow rising mortgage rates by around 13 months. The market-led rise in mortgage rates poses a mild threat to new dwelling consents starting in early-2017, given the normal lag.
Especially after the ban on most foreigners from buying housing in late-2018, which included immigrants with work, student, and long-term visitor visas, the link between population growth and consents broke down. Super high consents in 2022 came in the wake of extremely low population growth, while the latest major fall in consents followed a strong rebound in population growth. But, as shown in the first chart, the link started to break down after the Reserve Bank gained independence in 1990 and interest rate cycles became much more extreme.
I don’t expect the unfolding rise in interest rates to be the start of a major increase because there is a moderate amount of spare capacity in the economy that will help contain inflation. However, interest rates are likely to rise enough this year, flowing into 2027, to more than offset improving population growth; meaning a moderate fall in new dwelling consents is likely in 2027 into 2028.
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