What’s behind New Zealand’s runaway house prices?

New Zealand has been hailed around the world for its handling of the pandemic, reporting around 2,600 cases and just 26 deaths. Prime Minister Jacinda Ardern wasted no time imposing travel restrictions and national lockdowns, taking on an elimination approach rather than a “flatten the curve” approach. But the country is now becoming known for something else: its out-of-control house prices.

What’s happening with house prices in New Zealand ?

House prices in New Zealand rocketed to record levels throughout the pandemic. The average house price increased by 24.3% from NZ$665,000 (£345,750) in March 2020 to NZ$826,300 (£429,614) in March 2021, a record high for the country, says the latest house price index from the Real Estate Institute of New Zealand (REINZ)

The national median price increased by $46,300 (£24,072) from last month, which shows “just how much pressure has been placed on house prices and how we desperately need more supply to come to the market”, says Wendy Alexander, acting chief executive at REINZ. The percentage of auctions is also at the highest it’s ever been, which shows “just how quickly the market is moving”. REINZ expects house prices to continue rising over the next couple of months, though it hopes that changes in government policy and the onset of winter will slow the rate of growth a little.

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Why are house prices going up so much?

House prices have been driven up globally by “ultra-loose monetary policy” that has translated into historically low borrowing costs and a rush into property, but New Zealand “has become a poster child for the boom”, says Ainsley Thomson on Bloomberg. “Every week seems to bring new stories of unimaginable prices being paid.” Last month a “modest three bedroom bungalow” in the Auckland suburbs sold at auction for NZ$5.98m (£3.1m), around NZ$2.6m (£1.3m) above its local council valuation.

So what is the government doing about it?

In late March, the government said that the central bank had to consider house prices when making decisions around monetary policy – a job the central bank did not want, says Stephen Wright in The Wall Street Journal. The bank had warned in December that a change to its remit would have little effect on property prices because it wouldn’t influence housing supplies. But the government persevered, and Ardern has reiterated her commitment to improve housing affordability, something she first promised when elected in 2017.

As well as getting the central bank involved, the government is removing tax incentives for investors to make speculation on property a less lucrative business, and to unlock more land in hopes that will drive up housing supply, says Matthew Brockett on Bloomberg. Property investors have become the biggest share of buyers, but they will now be unable to claim mortgage interest as a tax deductible expense. The government also announced that it is to establish a NZ$3.8bn fund to free up more land for housing developments, and to make first-home grants available to more people.