The ‘perfect storm’ that saw Wellington slide into a home-building slump

Tuesday, 1 October 2024

Wellington has fallen into a home-building slump, with the rate of new dwelling consents per thousand people among the lowest in the country.

The Property Council says part of the problem is uncertainty about seismic standards. It wants standards locked in for 20 years.

Infometrics principal economist Brad Olsen says it’s nowhere as worthwhile for developers to build in the city now as they would like.

New home building in Wellington has slumped with one builder blaming a perfect storm of high interest rates and falling prices behind the drop.

Stats NZ figures show that in the year to July, Wellington had the 4th-equal lowest rate of new building consents issued out of the country’s 16 regions - better only than Gisborne, Taranaki and Southland, and equal with Hawke’s Bay.

The Wellington region’s rate of 3.8 dwelling consents per 1000 people was below the national average of 6.4, and far from the leader Canterbury on 10.1, or Auckland, which was third with 7.9.

Nationally the trend in building consents has been downwards for the past two years, but the fall has been worse in the Wellington region than much of the rest of the country.

Mike Holmes from builders Holmes Construction said there had been a “bit of a perfect storm” in Wellington. Property values had fallen while interest rates were high, meaning it was not financially viable for many people to build.

That, added to the chance of price increases during a build had put a lot of residential clients off.

Many people wanted to build, but he thought they were “still going to be sitting on their hands” during the next year, until they felt the time was right.

“At the peak of the market people were falling over themselves to build houses. That demand hasn’t gone away, it’s just the business case at the moment is just too challenging for people,” Holmes said.

Public sector cuts were a big issue for Wellington. Even people who kept their jobs may not feel confident enough to go ahead with a new build.

Land prices were also part of the issue. “The cost of the dirt is just so much now, you can’t improve it enough … specially the town house thing has stopped going ahead in Wellington at the moment.”

On Sunday, Building and Construction Minister Chris Penk outlined options the Government was looking at to reduce the number of building consent authorities across the country from 67.

A cumbersome consenting system sapped productivity and worked against growth and development, Penk said.

Solutions were needed that improved productivity and enabled building at scale.

Property Council chief executive Leonie Freeman said the number of consenting authorities did create inefficiencies, but consenting was just one of the steps that could cause delays in the process.

“All of these time delays add to the cost of building houses,” Freeman said. “A whole lot of things we need to work out, we need to make a lot more efficient.”

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Infometrics principal economist Brad Olsen said there were two parts to the Wellington home building story, the region as a whole, and just the city.

“Wellington region is down. Wellington City is down even more.” In the year to July, Wellington City was running at a rate of just 1.6 dwelling consent approvals per thousand population.

That was the 5th-lowest in the country, ahead of only four small councils. “It’s incredibly low,” Olsen said.

Part of the problem for Wellington was that it was nowhere near as worthwhile to build in the city as developers would like.

A key factor for Wellington was that house prices had some of the steepest drops in the country from their pandemic peaks.

Analysis of house price data showed prices in Wellington City had fallen 19% from their peak. That was the third biggest decline in the country, behind Lower Hutt at 23% and Upper Hutt at 22%.

Those falls had come after some large house price gains. So Wellington had seen much larger price gains through the pandemic, then a larger decline relative to the rest of the country on the other side. There were also more listings on the market.

Builders and developers looking for opportunities, seeing they would make 20% less than they thought they would have a few years ago, would ask: “Why would I build here at the moment?”

Wellington’s relatively slow population growth was another factor, and that was starting to be apparent with an increase in the number of properties available to rent.

Stats NZ estimates the Wellington region’s population is growing more slowly than that for the country as a whole. In the year to June 2023, Wellington’s estimated population growth was 1.3%, compared to 2.1% nationally, 2.8% for Auckland, 2.3% for Waikato and 2% for Canterbury.

“If it had a larger growing population, I think that would mean greater levels of demand,” Olsen said.

The fact land prices had not fallen in the way that house prices had was also a factor. There was “no point in building a new house at the moment”, given the cost of buying land and building a new house on it, compared to buying an existing house.

Olsen said he broadly supported Government moves to bring standardisation to the building consent process. Costs and delays did weigh on activity.

But he cautioned there was a need to avoid another leaky homes crisis.