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Slow and steady….
Building construction activity is making a strong recovery after the deep slump of
the recession and has now surpassed the pre-recession peak. Investment
intentions and building consents suggest there will be further improvements in
construction activity throughout 2015.
A lack of general inflation here and overseas, has meant that the outlook for interest
rates has become less restrictive. The unemployment rate is down, migration levels
are up while the house price growth in Auckland is back to double digits.
The strongest growth in non-residential activity has been in Auckland and
Canterbury. Building repair work is nearing completion in the Canterbury region but
is gearing up in the CBD while Auckland
shows a strong demand for new
buildings after many years of
under-investment. There will also be a
small boost in residential construction
in the Waikato, Bay of Plenty and Otago
Source: Forecast 75 New Zealand Trends in Property
and Construction First Quarter 2015—Rider Levett
Bucknall, prepared by the NZIER.
With activity in the existing housing
market picking up, the continued tightening of the labour market and relatively low
mortgage rates, conditions are favourable for growth in alterations and additions
activity. However, the outlook for non-residential construction activity has become
less positive as the uncertainty about the global economic outlook and slower GDP
growth in New Zealand are reducing businesses’ investment intentions as well as
limiting the willingness of the government to increase its investment spending.
Source: Building forecasts March 2015, Infometrics prepared for the BCITO.
Westpac Senior Economist, Michael Gordon believes that although non-residential
construction was down 5% for the quarter, the time lag between consent and
construction can be long and highly variable, and the strong upward trend in
consents shows that there is a significant amount of work in the pipeline for the
next few years. Nationwide construction spending is expected to continue to
underpin economic growth over 2015 and 2016. Source: Strong foundations Mar 2015, Westpac
NZIER pointed out house prices have grown out of all
proportion from rents, and that the assumed capital
focus on Auckland
growth that must underpin investors’ thinking is
relative to historical averages.
With the publication of the 11th Demographia report
“There is no one fix to rule them all,” says Shamubeel
the issue of housing affordability, has once again raised
Eaqub, Principal Economist at NZIER. “It’s not just
its ugly head. Demographia finds Auckland to be one
Chinese investors, it’s not just a lack of an effective
of the most ‘severely unaffordable’ cities on Earth.
capital gains tax, it’s not just councils’ planning rules,
The major reason for this, it states, has been the urban or cheap credit.”
containment policy which has created severe land use
restrictions, and without exception in a number of
“With that many variables in the mix, the solutions will
markets such as Auckland, Vancouver, Sydney,
be complex and perhaps the most effective measures
San Francisco and London [to name but a few] has been could come from unexpected corners, like rental
associated with higher land prices and in consequence, market reform.” Quoted from: The home affordability challenge
18 July 2014 NZIER Public Discussion Paper 2014/4 [1]
higher house prices.
Give me land, lots of land…
He declares that New Zealand currently has a ‘choice
problem’ rather than an affordability problem and the
top income earners who bought extremely expensive
property skewed the results.
Cartoon is BCITO creation
However, the Professor of Property at the University of
Auckland, Laurence Murphy asserts that the survey has
taken a ‘very simplistic view’ and freeing up land to
build more houses would not necessarily lead to lower
prices.
“We have a system that’s geared towards lending, and
kiwis borrow money to buy a house as accommodation
and as a ’retirement fund.’ As long as New Zealanders
use their house as a way to make money and expect
price appreciation, housing will be expensive.”
The NZ Property Council describes Auckland house
prices as “an abomination” and says “we’ve reached
the point of madness... It has now become starkly
obvious that the Proposed Auckland Unitary Plan
[PAUP] fails miserably at considering the economic
feasibility of projects, forcing developers to push costs
on to the customer. Add the housing shortage to the
mix, and there will be a generation of kiwis who will
never own or live in their own homes.
Source: Quoted from Stuff NZ Jan 19, 2015
Source: Press release January 2015 Property Council of New Zealand
“Kiwis need to change their ideas about home
ownership if they want housing to become more
affordable.”
Figure 1 shows it is the price of land
that has ballooned relative to
incomes, not rents, nor construction
Graeme Wheeler, the Governor of the Reserve Bank of
New Zealand is concerned with the risk Auckland’s
house prices are posing to the financial stability of the
broader economy. He believes that more needs to be
done to create opportunities for residential construction
in Auckland central.
It is the price of land that is driving high house prices,
Chris Parker, Chief Economist for the Auckland City
Council asserts, and the price of land is highest on the
isthmus and south-eastern parts of the North Shore.
He goes on to state that prices are not evidence of the
failure of markets or public policy. Rents as a fraction of
income is largely unchanged, whereas the ratio of
section prices to income has doubled since 1998.
“Very generally, even well-functioning competitive markets can experience
extreme price spikes. It can, he explains, be a market’s ‘call to arms’ to invest,
innovate and re-purpose resources [in this case land] to meet unanticipated or
emerging needs.“
He believes that more dwellings per unit can make a big impact to close the
gap by increasing the cash flow per unit of land.
The housing market is signalling the need to use existing land differently to
allow intensification. If land use regulations prevent this then land will
become less valuable and the risk of a major price correction becomes more
real.
The Proposed Auckland Unitary Plan allows for more intensification than the
legacy district plans.
He surmises that the increased ability to repurpose land, in conjunction with
development potential outside the Metropolitan Urban Limit and the
fast-tracking work of the Housing Project Office would seem to alleviate major
concerns about regulatory constraints.
See Chief Economist’s Newsletter, March 2015 Auckland Economic Quarterly for more detailed viewpoint.
“One in seven, or 203,817, Aucklanders live in overcrowded conditions,
including garages. People aged 20-24 are most likely to be affected, while
45.3 percent of Pacific Islanders lived in crowded households last year.”
Auckland’s population grew by 8.5% between 2006 and 2013, but the number
of dwellings rose by only 7.6%.
“It is not only young people who have been affected by the fall in home
ownership. There have been substantial drops in home ownership for
Aucklanders aged in their 30s, 40s and 50s since 2001.”
Rosemary Goodyear-Statistics NZ quoted in the New Zealand Herald, 26 Jan 2015
In response to the growing concern about affordable
housing Building and Housing, and Environment
Minister Nick Smith has announced major reforms to
the Resource Management Act [RMA] to reduce house
supply barriers and has quoted the Motu report about
the large impacts of regulations on the cost to construct
homes.*
“In Auckland,” he states, “much more needs to be done,
especially in creating opportunities for residential
construction in Auckland central.”
The report indicates that over the last decade, the RMA
has added $30 billion to the cost of building and
reduced new housing stock by 40,000 homes.
He outlined major changes the Government would be
including in its second phase of reforms in 2015 such
as recognising urban planning, prioritising housing
affordability, acknowledging the importance of
infrastructure, greater weight to property rights,
national planning templates, speeding up plan
making and encouraging collaborative resolution.
Issues, context, cause and solutions
of housing affordability
Rental contracts rebalanced toward renters
House prices are over-valued relative to history and
internationally. Until 2007, price increases were broad
based, since 2007 they have been concentrated in a few
regions
This is a complex story, and each strand deserves
in-depth research and the conclusion is clear.
There is no easy or quick fix to New Zealand’s
over-valued metropolitan housing market.
Whether house prices spiral up or down, the impacts of
the necessary policy solutions will not be seen
immediately. Not one single change will be enough.
The solutions need to be a complementary set – it’s like
taking a Swiss-army knife to a knotty problem.
Banking regulation less biased to housing with tax rules
applied evenly to any capital gains
This excerpt adapted from the graph—page 2, of The home affordability
challenge Discussion Paper, NZIER 2014/04 Author Shamubeel Eaqub.
Culture Threatens the cultural norm of home ownership
Renting is not equivalent to owning due to contract design
& policies
Financial Burden 50 or more years to save deposit and pay
off home, compared to less than 30 years for previous
generations is a substantial financial burden
Refer to Beehive.govt.nz/rma-reform-agenda
New Zealand’s crippling home affordability rates
cannot be fixed by a single solution such as changing
immigration policy or urban planning rules, or imposing
a capital gains tax or lending ratios states NZIER
Economist, Shamubeel Eaqub.
Land supply rules (greenfield and intensification) more
responsive to demand
Slow supply of land Land prices have risen strongly while
rents and construction costs have been more stable
Oversupply of finance Credit is very easy to get compared to
financing other investments
Demographic demand Bulk of demand comes from
predictable natural population growth and household size
change.
Volatility in demand comes from fluctuating net migration
While Auckland’s affordability score still remains below
the peaks of 2007/2008, its current trajectory suggests
it may soon return or exceed those levels.
A rise in house prices of 10%, with wages rising at the
same pace as last year and no interest rate increases,
would push it close to those peaks. If the latter
situation were combined with a modest half-point rise
in borrowing rates, the index would be propelled into
what, for Auckland’s recent record of affordability,
would be uncharted territory.
Source: Home Affordability Report, Dec 2014 Quarterly Survey, Volume 24,
No 4, Massey University
At this period of time, there are no moderately
affordable or affordable markets in New Zealand and
housing affordability has declined considerably in
New Zealand’s three largest markets over the last
decade.
Meanwhile, housing affordability in New Zealand
Investor demand Due to market access, history and tax effects continues to be the mantra of successive governments
Foreign investors do not appear to be the problem but
international evidence suggests continued monitoring needed and politicians while the context and scope of housing
Note: Some of the ’investment demand’ may be due to a
‘bulge’ of baby boomers in the market wanting investment
properties
affordability remains complex and multi-stranded,
with no definitive solution in sight.
Refer to Activity & Labour Trends, Winter 2013 article on housing affordability
*Motu, in its analysis of the impacts of planning rules and regulations on total development costs for property developers active in the Auckland market, found that almost 90% of surveyed developers were affected by delays or uncertainties related to regulation which had
a major effect on actual building costs of apartments as well as impacting on developing residential sections and standalone dwellings. See: “Impacts of Planning Rules, Regulations, Uncertainty and Delay on Residential Property Development” Grimes, Arthur and Ian
Mitchell 2015 Motu Paper 15-02, Motu Economic and Public Policy Research, Wellington. * Motu stress that only the gross costs and not the benefits were assessed [Motu was commissioned by Treasurey and the Ministry of Business, Innovation and Employment]