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No one factor can account for the increase in house prices since 2001. The trends in house prices are the net outcome of all the factors that affect supply and demand.
Source: Adapted from Australian Productivity Commission: First Home Ownership.
Some demand and supply factors are cyclical in nature and short-lived while others are structural and influence prices over the medium to long term. The factors affecting demand are discussed in section 6, the factors affecting supply are discussed in section 7. Prices are one of the determinants of the affordability of housing, with the cost of finance, taxes and income levels, being other key determinants.
In the short term, generally less than a year in New Zealand, the supply of housing is relatively fixed, or inelastic, so that increases in demand push up prices. In the longer term, the supply of housing is more elastic as developers respond to new demand and rising prices. In general, the long-term supply curve is less than fully elastic so that as housing demand rises, supply of new units will rise but so will prices. Ways of avoiding price increases with rising long-term demand include new technologies that reduce building costs, or some other favourable shift in the supply of the factors involved in building homes; for instance a pervasive reduction in the price of land, that shifts the supply curve out. Price increases can be avoided if the unit costs of building a dwelling remain constant, as in the case of a completely elastic supply curve. Reducing demand, for example through the tax system, could also reduce pressure on prices.