From famine to feast

New housing supply far exceeded an anaemic rise in new housing demand over the past year. New Zealand’s housing shortage shrank to an estimated 23,000 homes in the year to June, from a revised 57,000 homes last year.

Since then about 41,000 houses have been built despite the disruption from Covid, despite the lack of materials, and despite the difficulty finding staff, according to Statistic New Zealand data.

This is well short of the Reserve Bank’s prediction house prices will fall up to 20% from their peak. Reserve Bank Governor Adrian Orr says prices are now coming back to what the bank considers a sustainable level and that is a good thing as it removes financial stability risk.

In its latest Inner Kiwi publication, senior economist Jeremy Couchman says that is by far the largest addition to the country’s housing stock in the data going back to 1991. At the same time, new housing demand has slowed to a trickle as population growth has hit the lowest rate since the 1980s. 

“To put the gain homes in homes in context, the peak in construction during the mid-2000s only managed to produce a net 30,000 homes. Looking at the 2018 census data 41,700 homes is roughly the same as the number in the whole Southland region.”

Couchman says the “seismic shifts” in housing supply and demand drove down New Zealand’s housing shortage to an estimated 23,000 homes, still large but massively down from a revised 57,000 shortage estimated last year, so he sees the shortage disappearing over the next year. 

The country is now predicted to start accumulating a surplus of housing over the coming years as projected building activity outstrips rising demand.

However, there is a cloud hanging over future building activity, he says. “The housing market is now not conducive to property development and with a lack of prospective buyers new projects may be delayed or cancelled.”

Couchman says forward indicators suggest the covid-era trends in housing supply and demand are about to change. “The outlook for house building has dimmed. And with border fully reopened, positive net-migration next year should see demand lift off lows.

“Importantly, there is significant uncertainty around demand and supply analysis. Some indicators, such as net new residential electricity connections, point to the potential for downward revisions to already published supply data.”

According to the bank’s analysis a growing surplus of houses is likely to weigh on the housing market and generate a slow recovery in house prices.

The housing market is clearly in retreat, says Couchman.

Credit conditions have tightened dramatically, in large part due to the RBNZ embarking on aggressive interest rate hiking to tame multi-decade high inflation. And the RBNZ isn’t done yet. “We see the cash rate reaching 4% by year end. Across the motu, sales activity this year is down by around a third compared to a year ago.”