Like the global economy, New Zealand’s new-build sector has faced many challenges so far in 2022, and developers have adjusted their offerings to suit current market conditions and changing appetites of buyers post-pandemic.

Bayleys National Director of Projects, Suzie Wigglesworth, says the rapid value escalation of homes and bare land sites at a time of low population growth and robust construction activity turned forecasts for a housing downturn on their head during the pandemic, with 2022 catalysed by sweeping government response to the creation of housing and infrastructure.

“Our Kiwi housing system is ploughing ahead, revering its position as a complex beast, and attempts at structural change by local and central governments have nudged developers to adapt to new parameters,” Suzie Wigglesworth says.

“For residential developments, government moves to free up land supply to build at scale and pace have come at a time when traditional retail funding has been constrained in response to the global economic climate and intense capacity constraints presented by rising prices and lengthened project timeframes.”

GROWING PAINS IN A SHIFTING ECONOMY

“The new-build residential sector has faced a challenging year, yet anecdotal evidence suggests buyers are responding to the benefits of buying new, although growing demand could present challenges of its own.”

Wigglesworth is referring to the role housing market activity plays in keeping inflation high – a challenge which has seen the Reserve Bank of New Zealand (RBNZ) up the ante on dampening consumer demand by raising the Official Cash Rate (OCR), which hit a seven year high recently at three percent.

“New Zealand’s economy has grown strongly over the June quarter, and there are early signs that housing market activity is starting to rebound after a slower pace over the bulk of this year. If this persists, it will put upward pressure on headline inflation, which could see the RBNZ draw out its programme of rate rises as it ensures this doesn’t become an embedded feature of the economy,” Wigglesworth says.

“Household bank balances are higher than pre-pandemic, and the labour market remains firm. We are seeing owner-occupied demand for new housing return following some hesitancy from buyers purchasing off-the-plans.”

Wigglesworth says the Bayleys Projects division has been very selective in choosing the developers it partners with and the projects it promotes.

“Supply chain woes, considerable increases in the price of materials and labour fuelling timeframe delays have put some less experienced building firms in challenging positions, which is why it is so essential to make informed decisions.

The latest Value of Building Work Survey by Statistics New Zealand estimated residential building costs have increased by 17 percent in the year to June 2022, with much of the rapid growth driven by rising costs rather than an increase in activity.

“With more supply available for sale, projects without a point of difference have suffered, and we are increasingly seeing incentives offered for purchasers to entice them back to the market.”

Despite this, Wigglesworth says several Bayleys Projects have sold well throughout the slower market, underscored by well-located medium-density offerings and luxury apartments in main centres.

“While developers continue to face challenges which may eventually restrict the planned supply pipeline, there remains a wealth of private capital floating around the residential market, and we are seeing seniors with a windfall from the family home right-sizing into something more appropriate for their age and stage.

“Upscale projects like Winton’s Jimmy’s Point apartments at the water’s edge of Hobsonville in Auckland continue to attract a high level of interest from purchasers less impacted by rising interest rates or reliant on bank funding for their purchases.

“At the same time, a raft of affordable housing developments like Parkwood Estate in Auckland’s Westgate, Bellfield Estate in Papakura, and Lakeside in Te Kauwhata, North Waikato, are attracting entry-level buyers to the new-build market.”

NEW BUILD SWEETNERS

In response to high buyer demand back in 2021, the RBNZ reinstated loan-to-value ratio (LVR) restrictions which see owner-occupiers require a minimum of 20 percent deposit to qualify for mortgage lending.

Wigglesworth says moves from the RBNZ and central government to attract more Kiwis to the new-build sector are working, and the homes’ exemption from current LVR restrictions continues to provide a viable option for those aspiring to ownership with deposits of less than 20 percent.

“These projects are also extremely attractive to investors who retain the ability to deduct interest expenses from rental income on properties that are newly built.”

Of growing housing supply, Wigglesworth says issues around viable land for development and a solution for the funding of vital infrastructure are persistent and continue to keep the number of new homes coming online constrained.

Just recently, the government released its National Policy Statement for Highly Productive Land (NPS-HPL), which restricts housing development from encroaching on productive land for growing vegetables, fruit and other primary products.

Wigglesworth says it is good news for growers, who form a vital part of the nation’s breadbasket; however, presents difficulties for local councils directed to increase the housing supply efficiently.

“Greenfield development is a popular means of delivering housing targets because there aren’t the challenges associated with development in already established areas, and economies of scale can be more profitable for both developers and purchasers – evidenced by land value escalation over the last decade.

“The government’s moves to protect highly productive farmland will constrain the land available for development at urban boundaries.

“At the same time, there is steady demand from residential investors, which are encouraged by the government promises that taxes in the form of capital gains and wealth and land are presently off the table, although this could shift with a change of mood.

“The effects of these factors on constraining land supply for development and encouraging ongoing investment, while interest rates are still historically pretty low, are set to underpin purchaser appetites across the sector as we head toward the end of the year, and I expect prices will steadily increase again at a greater pace come 2023,” Wigglesworth says.