14 November 2022
Screenshot 2023-03-29 at 4.05.33 PM.png

By Cameron Bagrie, Economist.

New Zealand looks to be entering an over-building phase for residential housing, but the magnitude is somewhat up in the air. Expect to see concerns over the coming months over this issue but be careful with the assessments. There will be some fact but also lots of fiction.

One simple framework some commentators use to assess housing demand relative to supply is population growth divided by 2.6 people per house (demand) compared to building consents (supply). It is logical but also too simple. Population growth used to be 90,000 per year. You need a lot of houses (close to 40,000 per year) with that sort of growth and New Zealand has been playing catchup as we underbuilt for a long time. Population growth is estimated to be 12,700 in the year ended June 2022. Divide by 2.6 and you get 5,000 for demand relative to building consents (supply) of more than 50,000. That is when alarm bells can go off. Low population and lots of building does not make a good picture. That framework has numerous pitfalls so be careful around its use.

We have underbuilt for a long period. Housing is a critical part of social infrastructure and requires long-term planning around projected population growth not existing growth. Current suppressed population growth is being driven by a migration exodus, partly influenced by pent up demand for that OE, and immigration bottlenecks which are expected to ease. Housing supply is influenced by consents, but it is not the key variable to track. The construction sector can build 35,000 a year not 50,000.

Housing depreciates. Depending on the depreciation rate used, we need to be building 8,000 to 16,000 more houses each year.
Just over half of NZ homes were built in the past 40 years, with a large proportion built in the 1950s, 60s and 70s. This implies a considerable stockpile approaching the end of its asset life and in need of replacement or upgrading. Think of all those damp, not properly insulated homes.

Another major variable is climate change.
Estimates from the National Institute of Water and Atmospheric Research (NIWA), which modelled flooding from rainfall and rivers, estimated that about 411,000 buildings worth $135 billion could be exposed.[1]. On top of that you can add the potential for earthquakes and other natural disasters over the coming 30 years. Nelson’s recent flooding is a minor example.

You add all those factors up and the demand picture changes materially and needs long term planning when it comes to housing supply and not just responding to near-term population growth shifts.

The bottom line…
New Zealand does look to be entering an over-building phase in 2023. We can see that with rents softening, particularly in Auckland.
This should not deter building given the importance of long-term housing planning, it just puts more focus on the product being fit for the market. We may be eliminating the housing shortage but not a shortage of affordable housing. Consents for houses are dropping sharply whereas consents for townhouses and multi-unit dwellings are not. Population growth is also being driven by the 65 plus age growth with the population aged below 65 shrinking, so some segments will have more demand relative to others.

Cameron Bagrie, Economist