The house construction cycle explained

Housing Market Written by Tony Alexander, May 26 2022
Construction
Guest post from Tony Alexander

Guest post from Tony Alexander

In my last column on the residential property sector in New Zealand I couched things in terms of knowing a market has turned by the sort of complaints coming from some real estate agents. In my monthly survey of agents alongside REINZ a large number recently expressed concern about media talking the market down. That is a sign of falling sales and worries about further declines as buyers step back.

Here is another sign

Two times in the past week I have had requests to use my name in advertising by development companies. What they are finding is that client enquiries are falling away. People can see prices falling so will naturally feel the longer they wait perhaps the cheaper the construction cost will be.

Interest rates are rising

So naturally some people are finding they can no longer qualify for a mortgage or they simply feel risks are too great. Construction costs are soaring (which will limit price declines) and there are reports of some developers and builders failing because of supply chain problems.

Gib shortage not going anywhere quickly

In particular recently the shortage of plasterboard has received a lot of attention with a growing view that the situation will not much change until the new factory producing Gib Board opens in Tauranga towards the middle of next year.

Banks are also requiring more presales from developers before they commit to funding.

I’ve also received an email from a builder noting that at the moment there is a massive scramble for supplies. But perhaps come early next year there is a growing sector view that volumes of construction will fall away reasonably firmly.

A key thing underway currently is the lack of a feeling of urgency on the part of buyers. But they still remain interested in making a purchase. They hold back as others hold back and by doing so produce conditions which justify their holding back. 

But at some stage the environment will shift

For now, worries about rising interest rates are strong. But perhaps before the end of this year popular discussion will turn towards when those mortgage rates start falling again. This discussion will be driven by the evidence of weakness in our economy.

However a change in interest rate expectations does not automatically mean those rates start falling. That is unlikely in 2023. In addition, for the next 12-24 months a lot of attention will be paid to net migration outflows from New Zealand (the brain drain), alongside prices for houses on average generally falling until perhaps the middle of 2023.

What we will be left with is a decrease in house construction, but still a great swathe of people wanting to purchase a property. At some stage (which I should be able to identify 2-3 months before others through my five monthly surveys), people will re-engage with the market. That probably won’t come until 2024-25.

It won’t mean a new big pickup in house prices or surge in construction activity

But it does mean that for those developers who get through the next two years there will be demand to justify in most cases the purchases of blocks of land undertaken over the past year or so. All they have to do is keep the financing of such purchases in place as we wait for the cycle to eventually turn.

For real estate agents and mortgage brokers this outlook implies easing levels of activity through to maybe late-2023. The plateauing in the decline will come before a recovery in orders for new dwellings because that is what always happens in the housing cycle. We buy existing properties then as supply becomes less generous we think about getting a new house built.

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