Housing Prices Relative to Consumer Prices: An Analysis

By Brian Easton, Adjunct Professor, AUT, for The Policy Observatory

Since 2002, but excluding the period when the Global Financial Crisis impacted (2007-2012), house price rises in New Zealand have averaged 12.4% more than the Consumer Price Index (CPI). This differential is almost ten times the pre-2002 rate.

Using Reserve Bank of New Zealand data, Brian Easton compares house price changes to the Consumer Price Index (CPI), a measure of general inflation that does not include house sales. This report reveals the extent of the gap between CPI rises and house price rises, concluding that houses today are overpriced.

His findings include:

• The sharpest periods of house price rises were the early 1970s and early 1980s – but these were also times of high general inflation. What makes recent house price changes so extraordinary is their occurrence during a time of general low inflation.

• From 1962-2001, house prices rose on average 1.4% faster than the CPI. After 2001, the gap between the two measures widened considerably to 8.2% on average.

• If the long run relativity between house prices rises and the CPI that existed between 1962 and 2001 had persisted through the following 14 years, house prices today would be half the level they actually are. It could be argued that this is a measure of the degree by which housing today is overpriced.

• Brian Easton considers the prospect of deflation or stagflation, using historic trends as a guide.

A new report by economist Brian Easton, available here:

https://thepolicyobservatory.aut.ac.nz/publications/housing-prices-relative-to-consumer-prices

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