While interest rates have had a huge impact on rising property prices, independent economist Cameron Bagrie says surging population growth courtesy of booming migration and a critical underinvestment in new housing supply have been the pressure point for high house prices.

But with borders now closed and migration at a minimum, construction activity appears to be playing catch-up against the backdrop of slowly rising interest rates.

So, could we go from building too few, to too many?

THE PAST

With a national population that’s been growing at around 90,000 each year for many years, determining New Zealand’s housing shortfall has been a difficult task.

Historically, the country’s construction activity has been exceptionally sensitive to periods of economic disruption.

While we welcomed a new wave of international residents tasked with supporting the country’s growth, building consent numbers slumped following the global financial crisis, and have struggled to meet demand ever since.

Forecasts have seen estimates of the shortfall range between 9,000 and more than 150,000, however, Bagrie says it’s not just about population growth and building consents.

Forecasts have seen estimates of the shortfall range between 9,000 and more than 150,000, however, Cameron Bagrie says it’s not just about population growth and building consents.

“Analysts need to make assumptions about the number of people per house, also, depreciation on existing stock – are some homes not fit for purpose?”

“Owing to these variations housing shortage estimates can vary widely while demand patterns change according to what people actually want.”

THE PRESENT

“With population growth now less than 40,000 per year, building consents running more than 40,000 annually, and the assumption of two-or-three people per residence, the numbers show we’re eating into the shortage,” says Bagrie.

In answer to how large New Zealand’s housing shortfall might be, Bagrie is dubious of estimates exceeding 100,000.

“I tend to take guidance from the rental market; sharply accelerating rents are a sign of a genuine shortage, and the rental market flattening out is a sign that housing supply is not too far from being in balance,” he says.

“I tend to take guidance from the rental market; sharply accelerating rents are a sign of a genuine shortage, and the rental market flattening out is a sign that housing supply is not too far from being in balance,” Cameron Bagrie says.

Historically, average rental growth in Auckland, our largest and most controversial city, sits somewhere between three and five percent year-on-year.

Yet, recent data from Statistics New Zealand shows Auckland rents edged up just 2.5 percent in May 2021 when compared with the 12-months prior.

This contrasts against the rest of the country which saw high rent rises by historical standards of 9.6 percent for the wider North Island (excluding Auckland and Wellington), and the South Island (excluding Canterbury) which grew 5.8 percent.

“My personal view is that in Auckland the housing shortage story is overblown,” Bagrie says.

“We have an affordability problem, and there are pockets where there is a genuine shortage of quality stock – think retirees moving from the family home into something more comfortable - but in aggregate, I think Auckland has a shortage that is balancing at haste.”

Bagrie notes that the City of Sails has seen a huge ramp-up in the supply of townhouses and apartments, property types which, he says may be more vulnerable to a correction.

“Potential value growth tends to come through the site or land, and because these property types do not have a big land component it makes them cheaper and more affordable, but also susceptible to volatility.”

Bagrie believes that while the housing shortage is real, is it disproportionately affecting New Zealanders by region.

“Auckland has been consistently building more houses than required to meet current population growth for a couple of years now, and that’s going to continue into 2022, so that supply-demand situation, I think, is going to turn.”

“12-24 months of building consents above population growth will eat into the shortage of housing pretty quickly,” he states.

While Auckland, he says, is straddling the line between balance and over-supply, regional New Zealand may still have a bit of pep left.

While Auckland, Cameron Bagrie says, is straddling the line between balance and over-supply, regional New Zealand may still have a bit of pep left.

“People often talk about net migration across borders, but not much about regional migration within New Zealand.”

“We saw this trend continuing from the 2013 and 2018 Census data, with people moving out of Auckland and into the regions where housing is cheaper and lifestyle factors are more attractive.”

“We have a big legacy of under-build in the regions that will take a longer time to rectify,” Bagrie notes.

THE FUTURE

All eyes will be on interest rates and inflation, but, according to Bagrie, the old supply and demand chestnuts still apply when it comes to the future of the housing market.

Highly publicised supply chain disruption has led to record prices for key building materials timber and steel, while a critical skills shortage means the construction sector simply doesn’t have the labour to do all the work.

“Australia has the same shortage of skilled labour that we do, and recruiters across the ditch are waving the cheque book around over here,” he explains.

Immigration and supply-side capacity constraints are still big questions for the future.

In Auckland, council data showed that while more than 13,000 Code Compliance Certificates (CCCs) were approved for new dwellings in the year to April 2021, many of those were issued in the latter half of last year, with figures over 2021 dwindling month-on-month.

Bagrie notes while there are intense capacity pressures across the construction industry that will lead to a degree of attrition, he expects for the most part we’ll simply see a longer lag time between dwelling inception and the finished product.

Looking ahead, the Government has made its intention clear for an overhaul of migration policy, and while we do not yet know what that looks like, Bagrie expects it is safe to say migration will not reach the previous peak.

“With building consents running at 40,000 per year, new supply will replenish markets just as population growth and demand slows.”

“Yes, as more supply comes online, the market will go through a weakening phase and house price growth will ease, but should it be scary,” he asks?

While political attention, Government intervention, talk of debt-to-income tools and the use of loan-to-value restrictions are a powerful combination without the talk of migration and super-low interest rates, the tune for the second half of 2021 is slowing growth.

“But, in 2022 it’s a different story, and I expect various regions will have more upside than Auckland which has a negative number written all over it,” Bagrie says.

“Interest rates are moving up and Auckland is an expensive market where a shift in supply and demand could skew the risk profile,” he adds.

“However, in the scheme of things, when house prices have risen more than 20 percent in the last 12-months, the magnitude of any negative number will require a sense of perspective,” he says.