House construction will eventually exceed requirements

When it comes to discussions about housing in New Zealand it is almost heresy to say anything other than that there is a housing shortage, a housing crisis. How can one argue the point when the state house waiting list has blown out from 5,000 to 23,000 under the Labour government, rents have risen 22% the past three and a bit years while incomes have gone up just 11%, and listings of property to buy are running near 70% lower than ten years ago?

At the moment there is a shortage in some parts of the country, most notably Auckland, because of insufficient construction there. In addition, there is a shortage generally of affordable accommodation because since the mid-1990s only about 5% of new houses built have been priced in the lowest 25% of the house price range as compared with 25% in that range before then.

But there is also a perceived shortage because so many people are trying to buy and prices are rising strongly. People believe that if prices are rising and many consider this to be a bad thing, that there is by definition a shortage.

I would advise some caution

First, there are many special factors in play at the moment causing housing demand to be unusually high. There are record low interest rates bringing forth new owner occupier buyers and dragging in investors discouraged by low bank term deposit rates. People are buying because they cannot travel. For a while the LVRs were not there.

People also built up savings during lockdown last year, many people expect a wave of expats to flood home when the borders properly open so are buying before they arrive. Plus there are some other factors.

None of these factors will persist. At some stage they will fade away, FOMO (fear of missing out) will ease, and price growth will settle down.

Nonetheless, in the minds of everyone currently, a shortage persists – and that is interesting because it means all stops are being pulled out and policy proposals thrown around to accelerate the pace of house construction in New Zealand as much as possible.

For instance, amongst the March 23 changes is an incentive to investors to finance construction of new builds because they retain ability to deduct interest expenses they can no longer get by buying an existing property. The government has created a $3.8 billion fund councils can use to fund infrastructure for new subdivisions. Reform of the RMA is coming along. Councils will soon not be able to stop construction of six-storey apartment buildings in six cities.

The level of house construction looks like rising further, even if we will lose some builders across the Tasman soon and some materials are in short supply. But there is a big problem which doesn’t really change anything now, but could bite some people badly in 3-7 years time.

The current level of house building in New Zealand is not sustainable beyond perhaps five years.

Why? Statistics New Zealand project that our population will grow by 1.3 million between 2018 and 2048. At a 2.8 occupancy rate that means we need about 470,000 houses to be built. Allowing for only 80% of dwelling consents issued adding a net amount to the housing stock (some houses will be demolished, holiday homes etc.), that means we need 580,000 consents issued between 2018 and 2048.

Already 110,000 have been issued. We need another 470,000 over a 27 year period, which works out at 17,500 a year. Let’s bump that up to a round 20,000 to cover the catch-up needed in Auckland.

At the current pace of consent issuance of 39,000 a year, we can build all the houses needed for the next 27 years in just 14 years.

At some stage there will be an “adjustment” in the level of house construction in New Zealand. But not now. Maybe 5-7 years out.

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