NZ gained 27,000 homes last year while population growth hit 31-year low

Friday, 29 April 2022

New Zealand gained 27,875 new homes last year – the largest increase in property stock since 2017 when house price stagnated, property data firm Valocity figures show.

While supply was going up, demand stagnated. According to Stats NZ data 7500 more people left than arrived in the year ending January, driven by the departure of about 10,100 non-citizens.

This net migration loss reversed a long-term trend that had continued to the year ending January 2021, when the country gained 25,000 people.

But despite a fundamental shift in the supply-demand equation, house prices rose roughly 30% last year.

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When Auckland University professor of economics Robert MacCulloch reads the figures, he is reminded of a guest lecture given by Harvard economist Edward Glaeser in 2013.

MacCulloch says Glaeser, who is regarded as the father of urban economics and an authority on housing bubbles, spoke about how housing shortages could trigger a price boom, and that even when supply caught up, price momentum could carry on.

“Even when you release supply you still get this momentum, the bubble can keep churning on for a year or two,” MacCulloch says.

MacCulloch says it is likely that last year’s price rises had a bubble-dynamic, and with house prices already down 4% this year, a correction may be underway.

He also expects the recent amendments to the Resource Management Act, which will allow buildings of up to three storeys on most sites in cities without any need for resource consent from August, will have a large longer-term effect on housing supply.

There is even the prospect of over-building.

“They haven’t been forecasting that here, but the thought has gone through my mind,” MacCulloch says.

Valocity’s data was gathered by analysing districts’ valuation rolls, which Valocity head of valuations, James Wilson, says it a good proxy for completed homes.

Wilson says 2021’s price rises, which occurred at a time when more people were leaving than arriving and housing supply rose, reflected market fundamentals had fallen away.

He says record low interest rates made borrowing so cheap, people became more focused on getting their hands on properties than the prices they were paying for them.

The relaxation of loan to value ration (LVR) requirements at the start of the pandemic also played a part in the unintuitive price rises.

“It’s the ‘fuel in the fire’ effect, so making the money so much cheaper as a response to Covid creates excess demand for properties, trumping the amount of new stock being created,” Wilson says.

“When the cost of borrowing goes past a certain point people pay less attention to the price they’re paying and more on just getting a house.”

“It seems a little ludicrous to say that, but we have seen the market act that way.”

Wilson says there is a link between new supply coming onto the market and prices, but the two did not necessarily correlate perfectly.

Maybe not a bubble – but definitely a tyre with a slow leak

Calculating the housing shortage is difficult, but Infometrics took a crack at it in late-2019 and estimated the country was 30,000 to 40,000 homes short.

Infometrics principal economist Brad Olsen says the shift to migration losses last year was significant, and even with the natural population growth from births, in the year to September 2021 the population only grew by 0.4%.

This was the lowest annual growth since 1989, and supports the notion that demand stagnated.

However, Olsen says 2021 followed a record 2.4% population growth the year before, and with new fast-tracked visa programmes, many of the new-arrivals are adding buyer demand.

The overall result was that over 2020 and 2021, population growth and demand in the market will have evened out to average.

Olsen says a bubble is only known as a bubble when it pops, and the market has not popped yet.

“It’s something that is slowly deflating, after being pumped larger over the last decade and some extreme acceleration in growth over the pandemic period,” he says.

“Given all the factors we are currently seeing, I don’t think – yet – that we can call the housing market in a bubble, simply because I don’t think at the moment it’ll pop.

“It’s more like a tyre with a slow leak at the moment – it hasn’t collapsed, but it’s leaking out slowly – but still looks like a tyre.”

Pain coming for some buyers

Interest rates are now back to where they sat pre-Covid, and while still relatively low, Wilson says a lot of people who jumped into the market to buy another property are going to be feeling pain as their fixed-terms interest rates roll off.

He does not expect a market crash, because he says banks have acted responsibly, and the swift reimposition of LVRs meant there is a lot of ‘meat in the pie’ in terms of money invested in homes.

The requirements for most first home buyers to have paid a 20% deposit and most investors 30-40% also means the spectre of homeowners having negative equity is unlikely, unless prices go off a cliff, which Wilson says signs are not pointing to.

Home completions slow

The up-tick in the number of new homes being built appears to have stalled this year, with only 6990 being completed to-date.

Auckland remains roughly on par with last year, with 2848 more homes added this year compared to 10,423 last year.

In Canterbury 1276 new homes have been added this year compared to 4933 last year, but in Wellington only 378 new homes have been added, compared to 2551 last year.

Wilson says high building prices and delays in receiving materials are behind the slowdown.

He expects that dip in activity to continue for a year or so and then it’s “off we go”.

“We are on the right track now and this data is starting to show that.”

Light at the end of the tunnel

Wilson believes there are better times ahead for first home buyers – particularly in Auckland.

He says the benefits of Auckland’s Unitary Plan are beginning to be seen, and with townhouses and other medium density builds now the norm for new builds, more homes at the right price point are hitting the market.

The creation of high growth corridors in the likes of Drury is also going to help bring more stock to the market.

”New Zealand has finally started to understand it’s about building smarter and not just building more,” Wilson says.

“If we keep building Mcmansions​ forever, we are never going to solve the housing crisis.”

Developer activity not expected to stall

There has been concerns of a slowdown in developments after two townhouse sites recently appeared in mortgagee sales and Auckland property developer David Whitburn saying there has been a general pullout of Chinese finance from the property market.

Wilson says there is no widespread liquidity crisis among banks or lenders, like there was during the global financial crisis, nor is there any signs of a general funding pull-out.

“We are now hearing about developments not being completed, or developers changing halfway,” Wilson says.

“They are probably ‘late to the cycle’ developers, or new developers without experience or scale to ride through short to medium-term disruptions.”

Wilson says developers whose business model rely on rising prices to make development profitable may be in trouble.