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The tax system and housing demand in New Zealand

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Abstract

This paper characterises the relationship between wealth and consumption in New Zealand. We find that there exists a long-run cointegration relation between household consumption, income, housing wealth and net financial wealth. Permanent shocks account for most of the variation in wealth. This implies that our cointegration estimates accurately capture the effect of most wealth changes, in contrast with the findings of Lettau and Ludvigson (2004) for the United States. Our estimates suggest that consumption has adjusted sluggishly to restore longrun equilibrium, but also that consumption booms have anticipated equilibrium-restoring increases in housing wealth. Furthermore, we estimate two alternative econometric models which are more robust to instability in the long-run relationship. All three of our models suggest that permanent changes in wealth have economically important effects on consumption. The dollar-for dollar-effect of financial wealth exceeds that of housing wealth.

Suggested Citation

  • David Hargreaves, 2008. "The tax system and housing demand in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/06, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:2008/06
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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/2008/dp08-06.pdf
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    1. Nathalie Girouard & Mike Kennedy & Paul van den Noord & Christophe André, 2006. "Recent House Price Developments: The Role of Fundamentals," OECD Economics Department Working Papers 475, OECD Publishing.
    2. Emmanuel De Veirman & Ashley Dunstan, 2008. "How do Housing Wealth, Financial Wealth and Consumption Interact? Evidence from New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/05, Reserve Bank of New Zealand.
    3. Poterba, James M, 1992. "Taxation and Housing: Old Questions, New Answers," American Economic Review, American Economic Association, vol. 82(2), pages 237-242, May.
    4. Roger Gordon, 2004. "Taxation of Interest Income," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 5-15, January.
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    Cited by:

    1. Robert A. Buckle & Aaron Drew, 2008. "The business cycle, housing and the role of policy: summary of a recent conference held by The Treasury and the Reserve Bank of New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 71, March.
    2. Chris Bloor & Bruce Lu, 2019. "Have the LVR restrictions improved the resilience of the banking system?," Reserve Bank of New Zealand Analytical Notes series AN2019/07, Reserve Bank of New Zealand.
    3. Steven C. Bourassa & Song Shi, 2017. "Understanding New Zealand’s decline in homeownership," Housing Studies, Taylor & Francis Journals, vol. 32(5), pages 693-710, July.
    4. Glenn Otto, 2021. "Accounting for Longer‐Run Changes in Australian House Prices," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 54(3), pages 362-374, September.

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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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