Why do housing prices soar despite a COVID recession?

Edward Yiu
Edward Yiu, Department of Property

Housing prices in New Zealand increased by about 20 percent in 2020, one of the highest surges in the world. This occurred despite an expected fall in house prices caused by the COVID-19 pandemic, where our GDP annual growth rate fell to -2.9 percent, the lowest since 1989.

Many analysts provide different explanations for the house price upsurge, such as insufficient housing supply or the lack of capital gain tax. However, we have seen a general rebound in house prices in most developed countries after the outbreak of COVID-19. For example, around 90 percent of the house price indices estimated by the international house price database recorded an increase in 2020.1 This includes Australia, Canada, New Zealand, the UK and the US and suggests the increase is more likely caused by a common factor applied across all these countries than a local issue.

So, we can refute an economic growth hypothesis, as the pandemic caused recessions in most developed economies through 2020. We can also exclude the migrant theory as it doesn't apply to many countries. Also, the Overseas Investment Amendment Act, which came into effect in New Zealand in 2018, has seen the percentage of residential properties sold to non-citizen or non-resident buyers plunge from 3.3 to 0.6 percent from March to September 2020.

One of the most common explanations for the rise in house prices in New Zealand is insufficient supply. However, this doesn't account for the concurrent increase in house prices in other developed countries throughout 2020.

The monetary policy hypothesis, however, is more tenable as there was a synchronised response from most of the central banks to cut their interest rates (some to historic lows) during the pandemic2. For example, the Reserve Bank of New Zealand decreased its Official Cash Rate from 1 to 0.25 percent and the mortgage loan-to-value ratio restrictions were also removed in early 2020. After cutting interest rates, the world reverts to an inflation track, causing a negative real interest rate regime.

These casual observations support the idea that a negative real interest rate (or oversupply of credit) causes asset price rallies.

There is also a historical precedent, with abnormally low interest rates driving property prices upward in the Asian Financial Crisis in 19973 and the Global Financial Crisis in 20084.

Suppose we do a panel regression analysis on Australia, Canada, the European Union, Hong Kong, New Zealand, the UK, and the US, using data from 2017 Q1 to 2020 Q4. In that case, the results confirm that the real interest rate imposes a significant negative effect on the house price growth rate (after controlling the economic growth factor, the unemployment factor and the cross-economy fixed effect). A similar result is also found in a single country time-series regression on New Zealand.

Our Reserve Bank Governor Adrian Orr also "admitted that the Reserve Bank's monetary policy-led decline in interest rates has contributed to a rise in house prices"5 and the Reserve Bank has subsequently reinstated mortgage restrictions in 20216. This decision implies an agreement from the Reserve banks that the house price soar is, at least partially, associated with monetary and mortgage policies.

Edward Yiu is an Associate Professor in the Department of Property at the University of Auckland Business School


  1. Adrienne, M. & Martínez-García, E. (2011) A Cross-Country Quarterly Database of Real House Prices: A Methodological Note. Globalization and Monetary Policy Institute Working Paper no. 99, Federal Reserve Bank of Dallas, December.
  2. Kingsly, K. & Henri, K. (2020) Central Banks Respond to COVID-19 to Stave off a Financial Crisis, They Need for Targeted Fiscal Measures Should not be Understated, SSRN.
  3. Yiu, C.Y. (2010) Negative Real Interest Rate and Housing Bubble Implosion – an empirical study in Hong Kong, Journal of Financial Management and Property Construction, 14(3), 257-270.
  4. Yiu, C.Y. and Liusman, E. (2015) Negative real interest rates and the bursting of Spain’s housing bubbles: The fourth confirmed case. Presented in International Conference on Banking, Real Estate and Financial Crises: Hong Kong, China and the World, 17 January 2015.
  5. Small, Z. (2020) Reserve Bank Governor Adrian Orr recommends new housing agency to coordinate response to rising house prices, Newshub, 11 Dec.
  6. RBNZ (2020) Reserve Bank proposes reinstating LVR restrictions, 8 Dec.