The housing construction decline is causing headaches

Guest Post by Tony Alexander

The key thing occurring in the residential property market at the moment isn’t to do with prices or the volume of sales. Instead it is the realisation dawning on many people including in the media that the outlook for house building is poor and getting worse.

Just this morning I listened to a radio discussion about the increasing payment problems being experienced by those who have supplied goods and services to builders, and rapid falls in the number of consents being issued for new dwellings to be built around the country.

The builder being interviewed quite rightly placed the blame for problems at the door of the Reserve Bank which took interest rates to absurdly low levels during the pandemic and caused a boom in construction which is now catching a lot of people out.

The 40% escalation in building costs over the past 3-4 years, high interest rates to fight inflation which for a while was above 7%, and problems inherent to the Resource Management Act have combined to produce problems for both buyers of new homes and the developers.

Building of speculative houses — those where a buyer is not in place when construction starts — has dwindled away to very low levels. Construction of multi-unit complexes is stalling because pre-sales of units in sufficient volumes to get a bank to advance finance cannot be secured in many instances.

I can attest to the growing problems for developers in the form of requests for speaking engagements and columns with extensive use of my name and image to a degree never before seen.

What will be the outcome of a substantial decline in new home construction over the next year and a half?

At a time when migration inflows are booming, we can anticipate extra upward pressure on rents and eventually a fresh surge in house prices.

So far, I struggle to see the extra rents pressure, but I can tell from my monthly survey of property investors that the ability of landlords to pick and choose the tenants they want has greatly increased. Those with pets, maybe children, maybe tattoos could be in for a period of struggle especially as the antipathy directed by the media and young people towards landlords means more than usual will likely look to sell their properties.

In fact this movement towards more selling by investors is something coming through clearly in my monthly survey. That means more pressure going on the public housing stock and parts of the country looking to reduce use of motels to house social clients may struggle to find somewhere else for these people to move to.

For the moment while interest rates remain at high levels to fight inflation created by the Reserve Bank, it is difficult to envisage any special jumps in house prices on average. But once rates come down potentially quickly from late this year and once people work out the implications of strong population growth at a time of falling construction, a period of rapid price appreciation is likely.

When might the Reserve Bank signal that they will start cutting interest rates before the mid-2025 timetable which they are running with?

Not at the coming policy review on April 10, and maybe not even the review after that on May 22. But from the next cash rate review on July 10, the chances of some dovish comments which will prompt extra lowering of fixed mortgage rates look quite good.

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