ANZ’s latest Housing Focus report says housing is now scarcer than before, and residential investment demand (to repair/rebuild) will be stronger than otherwise.
ANZ’s chief economist Sharon Zollner says while there aren’t official estimates of the damage, the bank hasn’t attempted to incorporate these events into its forecast, but can look the risks.
In the affected areas, the impacts on rental inflation, housing stock, and construction costs could be quite extreme, but in aggregate terms, the impacts could be relatively muted, says Zollner.
Consents give a picture
In total, 49,538 new dwellings were consented across the country last year and of that, 21,400 were houses. Multi-unit dwellings such as apartments, townhouses, and retirement village units make up the difference.
“So far, from what we’ve been able to gauge, the number of red and yellow stickered properties appears to be in the low thousands.”
As the headlines roll in about how many houses are damaged in each region, it’s useful to have a feel for what these figures represent in terms of local residential construction activity in more normal times, she says.
A thousand houses in Auckland comes in a touch under 5% of 2022 consents, while in Gisborne, which issued just 162 consents in 2022, this would represent more than 600% of total consents in 2022. That is, every 1000 houses needing a full rebuild in this region represents about six years of local business as usual residential construction activity. For the Hawke’s Bay, 1000 houses would be about 16 months of business as usual.
In Auckland, the about 3,000 red or yellow stickered properties to date represent about 14% of total consents issued last. year, but about 62% of house consents, given the large number of multi-unit consents.
To put that another way, says Zollner, let’s assume construction resources are fully flexible between houses and multi-unit dwellings, and all 3,000 stickered properties require the equivalent amount of work as an average consent - almost certainly an overestimate as we are only considering consents for new builds.
“With those simplifying assumptions, this disaster would add about two months to the existing residential investment pipeline in Auckland. But if resource from the bigger end of town - e.g. apartment construction - wasn’t flexible, and we estimate this based on house consents only, this could be as high as six months.
“On the other hand, it’s likely that yellow-stickered properties, which account for around 80% of red and yellow combined, are less likely to require a full rebuild. And some stickered properties may not technically require any building work done on them at all – but the slope behind them might need a lot of expensive geotechnical work to enable the house to be lived in again. Geotechnical capacity is likely to be a bottleneck in the recovery process as a whole, given the amount of land that has been rendered unstable.”
At this stage, the impacts in Auckland are likely to be at the lower end of this two-six-month range, says Zollner.
“If we assume yellow sticker properties require less than 50% of the work associated with an average consent, then we may only be talking a one-month addition to the existing Auckland pipeline of works. Doable, is the upshot.”
She says ANZ is not in a position to speculate how many houses are likely to be impacted in each region. These numbers are still coming in. But relative to local productive capacity, Auckland is likely to be only affected region that will be able to repair/rebuild in a remotely acceptable timeframe out of local resources.
“The work will undoubtedly put upwards pressure on construction costs, however the rebuild following the Canterbury earthquakes certainly added to construction costs as measured by the CPI.
Rents under pressure
Rents inflation is also likely to come under intense pressure in the affected regions. These regions already had relatively tight housing supply after considerable population growth in recent years.
“While we don’t know how many houses will need rebuilding in the wake of Gabrielle, we do know that following the Canterbury earthquakes, about 7,000 were ‘red-zoned’, with thousands more needing either a full rebuild or significant repair. Annual consents in Canterbury peaked at 7,000 in the year to December 2014 quite some time after the earthquakes of September 2010 and February 2011.
Zollner says it’s clear the bank has more residential investment to factor into its forecast, but how much, and over what time horizon is unknown.
ANZ’s forecast, which doesn’t factor in any impacts from the cyclone, has residential investment activity falling from mid-2023 as higher interest rates and the weaker housing market weigh.
For the impacted regions, this is a mixed bag – higher interest rates are not helpful in and of themselves, obviously, but there is little spare economic capacity to accommodate a decent-sized rebuild programme.
“By lifting the OCR now, the RBNZ is freeing up capacity for this to happen in time. But labour mobility - getting the workers to where they are needed - will be a big part of how effective this is,” Zollner says.
“All up, higher than otherwise rents, construction costs and residential construction activity are all likely.
“House prices could be higher in affected regions in the near term owing to increased scarcity. Over the medium term, however, if the RBNZ ends up raising the OCR by more - due to cyclone inflation impacts or anything else - that is a downside risk for nationwide house prices.”