Is the construction boom coming to an end?

Guest post from Tony Alexander

There have been two key things happening in the New Zealand residential property market over the past few years. One of them attracts a lot of attention and commentary from month to month while the other changes more slowly but is highly relevant to where house prices will go.

With regard to house prices, we saw falls amounting to 11% during the global financial crisis, a doubling of prices in most locations in the years after that, then between 2017 and 2019 Auckland House prices sat relatively flat, while they continued to rise in other parts of the country, though at a decreasing pace.

At the very end of 2019, house price inflation accelerated under the influence of the Reserve Bank cutting interest rates to record lows because of worries about deflation. Then when the pandemic struck in 2020, we saw a brief period when average prices around New Zealand fell by 3%. After that they soared to ridiculously high levels come the end of 2021.

Since then, house prices have been falling and so far, are down by about 16% from their peak levels.

Discussion of these price changes and where things are going dominates housing market commentary.

But underneath it all we have seen a very strong rise in house construction without the same sort of up and down movements as has been happening for prices.

The number of consents issued for the construction of new dwellings rose from below 14,000 in 2011 to almost 51,000 just under a year ago. Now, those consent numbers are falling away. In the three months to February the number of consents issued for construction of new dwellings around New Zealand was down by 18% from a year earlier. In February the number was down 29% from February 2022.

There is a reasonably strong correlation between changes in dwelling sales and eventual changes in dwelling consent numbers. Sales nationwide look set soon to reach record low levels since the data started in 1992. This means we can reasonably expect to see quite a decline in consent issuance around the country.

In fact, it is not out of the question that the annual number of consents falls to 30,000 within two years.

This would actually still be above the average for the past 20 years of 28,000. It is tempting to write in terms of consent numbers falling even lower than this when we take into account the high levels of consumer pessimism, pressures from the soaring cost of living, above average mortgage interest rates, and the many problems which have beset the residential construction sector.

Those problems are now manifesting themselves as a great number of construction related businesses going into liquidation every week in New Zealand.

But while it is reasonable to expect that house building activity will now decline in relatively solid fashion for the next two years, it looks likely that we won't plumb the terrible depths seen back in 2011.

Over 2024 and 2025 interest rates are likely to be falling. The unemployment rate is set to rise but is very unlikely to reach the 6.7% seen in 2012. A rate just above 5% may be the highest it gets to this cycle. Importantly, population growth is accelerating quite strongly in New Zealand as the number of people moving into the country is surprising firmly on the upside.

The combination of rising demand for housing from accelerating population growth and falling growth in the supply of new houses will produce potentially firm rent rises next year which will start to drag some investors back into constructing dwellings in order to gain taxation advantages not permitted to those buying or owning existing dwellings.

In addition, this interaction of housing supply and demand is likely to see house prices rising again over 2024. This also will eventually act to stem the decline in house construction as buyers slowly, perhaps come late 2025, start looking back again at getting a new house built rather than sifting through the declining number of existing properties listed for sale.

But for now, negatives dominate in the house building sector.

Buyers need to apply extra caution as they contemplate getting a house built. After all, you can be sure that before your bank agrees to financing a new build they will want high certainty regarding the ability of the builder to complete the project.  

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