Statement follows finance committee’s questions
The Reserve Bank of New Zealand (RBNZ) has admitted that its annual house price growth forecasts over the past decade have gaps, noting that it has consistently undershot reality when analysing house price growth data.
In response to the Finance and Expenditure Committee’s (FEC) questions about the RBNZ’s house price forecasts, the central bank explained that it assesses the variance of its projections by looking at past forecast performance.
“Since 2010, on average, our forecasts for annual house price inflation one year in the future have been out by 5.2 percentage points (‘mean absolute deviation’). Excluding the COVID-19 period, the same metric is 3.9 percentage points,” the RBNZ said in a statement.
The central bank pointed to migration and mortgage interest rate data as factors contributing to house price inflation tending to be higher than anticipated over the past decade.
“Over the past decade, the key drivers of this deviation have been that migration has tended to turn out higher than forecast, and mortgage interest rates have tended to be lower than our forecasts would imply,” it said.
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The RBNZ explained in its report that its May 2021 projections were for a significant slowdown in the NZ house price growth in 2021, followed by a period of modest growth.
“This forecast rests on assumptions that high construction activity and weaker population growth would result in a gradual alleviation of supply shortages and that the official cash rate would be gradually increased from the latter half of 2022,” it said.
“It was also assumed that the re-imposition of loan-to-value restrictions and changes to the tax deductibility of interest would reduce house price growth in the near-term.”
The central bank also clarified that it produces a different forecast from the Treasury, with both agencies’ forecasting teams regularly discussing each other’s predictions and forecast methodology.
“In June 2021, the Reserve Bank, Treasury, and the Ministry of Housing and Urban Development established a technical working group to share data and analysis around the assessment of housing sustainability and to compare forecasting methodologies and economic modelling,” the RBNZ said.
