Westpac economists point to recent softening in Auckland house building activity; dwelling consents numbers have 'flat-lined' at levels well short of those needed to keep up with population growth

Westpac economists say the squeeze and shortage of housing in Auckland is going to get worse before it gets better.

In their Weekly Commentary the economists noted the July dwelling consent numbers released by Statistics New Zealand, showing that consent issuance in Auckland has fallen 8% over the past three months, albeit that this does included a pullback in the volatile "multiples consent" category.

"Looking at the longer-term trend, annual dwelling consent numbers have essentially flatlined at just over 10,000 since the start of this year, " the economists said.

"And the most recent figures actually point to some softening in building activity over the coming months.

"Importantly, dwelling consents numbers have plateaued at levels that are still well short of what's needed to keep up with population growth.

"Consequently, it’s likely that tightness in the Auckland housing market will get worse before it gets better."

The economists said while New Zealand was wrestling with a large and growing shortage of houses - and with the shortfall centred squarely on Auckland -  strong headwinds in the construction sector meant that building levels were likely to rise only gradually.

'Challenge to economic growth'

This would challenge the strength of economic growth over the coming year, and reinforced the case for interest rates - through the the Official Cash Rate - staying on hold for an extended period.

Westpac's picking that the Reserve Bank won't start raising the OCR from the current 1.75% till late 2019. Late 2019 is when the RBNZ itself is actually predicting that the OCR will start to be lifted - but most market expectations are for an increase from last 2018 onward.

The Westpac economists said Auckland's population had risen by much more than expected, and home building has not kept pace.

"This has seen housing market tightness in Auckland rising to acute levels, reflected in a sharp increase in the average number of people per dwelling."

Looking ahead, Auckland’s population was set to continue growing at a rapid pace, with around 290,000 more people expected to settle in the region over the coming decade.

Coming on top of the existing tightness in the Auckland housing market, this signalled the need for a significant number of new homes in the region.

"Despite the growing need for new building in Auckland, headwinds in the construction sector mean that we’re expecting only subdued growth in residential construction over the coming year.

"And recent developments indicate that growth in construction could be even softer than we're assuming."

The economists said several factors were providing "a brake" on residential construction.

'Difficulty accessing finance'

The first of these was that developers are encountering increasing difficulties accessing finance.

"This is particularly important in Auckland, given the greater prevalence of medium to high-density housing developments, for which finance can be a significant hurdle."

At the same time, capacity in the construction sector had become stretched following strong increases in building activity over the past few years.

"This has resulted in building costs rising at a rapid pace, with the cost of building a new home in Auckland up around 40% over the past five years alone."

Importantly, the economists said, this rise in building costs has come at the same time as the housing market in Auckland has been softening.

"Existing homes prices in Auckland are down 4% since the start of this year, and sales are at their lowest level since 2011.

'Developers will be nervous'

"Many developers will be nervous about building into a slowing market."

The economists said their forecasts for subdued residential construction are a key point of difference between them and the Reserve Bank.

"The RBNZ’s August policy assessment factored in continued strong increases in residential construction over the next few years.

"However, such increases look doubtful, especially with the slowdown in Auckland coming on top of the continued gradual wind-down of reconstruction work in Canterbury."

'Important implications for economy'

The "subdued" outlook for residential construction had important implications for economic conditions more generally, the economists said.

"Construction activity was a key contributor to increases in GDP and employment in recent years, with spillovers to a number of associated industries.

"But with the momentum in the construction sector now waning, it’s likely that we’ll see more moderate GDP growth over the coming year.

"This will make it even harder for the RBNZ to generate the pick-up in domestic inflation that they have long pursued."

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29 Comments

Perhaps capital is moving out of Auckland to places where building takes place much faster and there is likely to be an overall increase in building activity coupled to a decline in Auckland.

maybe capital is moving out of housing altogether, could be the Ponzi is starting to so cracks and those that got in first to feed it have got out and walked away

http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&obje...

Perhaps the true shortfall isn't in houses, but in buyers. Few of our immigrants these days are in the market for Auckland's million-dollar houses. Average salaries or wages for tens of thousands of immigrants - for perhaps the overwhelming majority of recent immigrants - won't be anything to envy. They're joining an increasingly low-earning, low-productivity economy. Bigger as a whole but increasingly squeezed individually.

There would be a true shortfall in Auckland if the place is flooded with potential buyers happy to accept absurd current asking prices. And there aren't these buyers, immigrants or otherwise. That tide has gone out.

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I think you've described a key problem (coincidental homage to one of the problem's architect's there). These new migrants at the bottom end, and young Kiwis, are asked to compete for stagnant wages, while at the same time being asked to compete with foreign millionaire buyers. With the last group having gone a bit quiet and - if National is turfed out - the attraction of Auckland as a place to launder money, park money, or acquire property may reduce, and who will be able to buy the million dollar houses then?

If you don't believe that people will buy then don't build...

I'm pretty sure Labour is going to give everyone who votes for them, a free home.

Taxinda in her advert......"homes for all"....it will be like a McDonalds drive through, oh you're on the benefit, would you like a new home with that!!

How fitting.
That pretty much frames you as the person working in the drive-through.

This is a bit silly. New Zealand has a long history of governments getting involved in fostering affordable housing through direct builds, Housing Corp loans, public-private partnerships etc. A comment such as this suggests a degree of ideological blindness and lack of historical awareness, that doesn't appreciate how NZ's affordable homes and high rate of home ownership actually came about.

Well said Rick Strauss
Your intellect is wasted trying to educate halfwits about the historical facts of NZs housing policies
Good luck Shane Jones & Winston Peters in the coming election

Hi skudiv,

Agree - and I expect that its "free home" policy will be announced in the week before the election.

And going on what has happened to date,National will then offer free + $1000 to up the ante in the lolly scramble..

I worry that Labour will tax like there's no tomorrow.........

Jacinda is fine as a front-person for Labour's election campaign....... but Labour's policies reek of fiscal imprudence.

I sense that over the weekend people have started to see that.

Agree!

Another new spawning - the Right is strong in this one.

I sense that National's talking points are being willingly picked up by their traditional votaries.

And this despite National's track record of promising not to increase taxes then breaking that promise multiple times over.

I worry that you aren't smart enough to read past rhetoric.
Actually, I don't worry. I know for a fact.

Taxes are bad. We all agree.
The size of government institutions should always be minimised.
But there is a lower limit to that - we can't always continually lower taxes. The country is currently at that lower limit, and it's not a good long term position to be in. Especially when we live in a country that thinks that selling crap to itself is the best idea around and every three years wastes 6 months electioneering on baseless promises and no vision.

"but Labour's policies reek of fiscal imprudence."
That's real pot calling the kettle black sort of stuff. One look at the National Party's policy and the story is not much different.

Assuming our household maintains its earnings (all salary), on New Years Eve we will look back and see we worked from New Year until the 26th of May to pay our income tax, then started to keep the fruits of our labour. No-one appears to be telling us we will pay less in the next three years, but I trust National to spend it better than the others. To be frank, after more than 35 years working I cant wait to get my chance to be the suckee instead of the sucker. You can only put so much burden on income producers before they say to heck with it and offload the weight.

Jacinda is fine as a front-person for Labour's election campaign....... but Labour's policies reek of fiscal imprudence.

This is actually an example of how govts deceive the sheeple. Govts are not h'holds or individuals who are constrained by income and ability to borrow. The idea of "fiscal prudence" doesn't apply to govts as it may to a business or a household. Furthermore, the more "debt" that a govt holds, the more "money" that the private sector holds. Simple balance sheet economies.

Here's a different and timely point of view about "fiscal prudence" from Mainfreight chief Don Braid.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1191...

. Taxes are bad. We all agree.
The size of government institutions should always be minimised.

Do you have a comparative benchmark for your "low tax, small govt" nation? Singapore? Dubai?

Perhaps you should have your own pyshic show in the vein of "Sensing murder" seeing as you have an insight into how the "people" are feeling " Sensing the electorate..with TTP..."

Gee ? Wasn't it Nationals ponytail puller that increased GST by 2.5% ?
Then increased fuel tax which has GST added !?
Was it not National that allowed foreigners to speculate in NZs family homes and take their profits out of the country tax free ?
Tell me how great National has been at fiscal responsibility and I'll tell you that's a lie

Do you actually have a fiscal horse in this race or do you get bored on those long New York evenings and feel the need to tell those of us actually keeping NZ running what we should be doing?

Foreign speculators taking capital gains out of the country, likely funded from buyers with mortgages sourced from the very overseas bank said speculators deposit with. The money goes full circle and then needs to be paid back with interest.

Bingo.

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What's worse a few more taxes here and there or allowing the chinese to inflate our house prices over the past 10 years so they are out of reach for our kids?

you kids don't have to buy, they can vote for labour and rent for life.

Or they can vote National and never have the choice

http://www.abc.net.au/news/2017-09-04/interest-rates-falling-despite-res...

australian banks are on the move. no wonder their NZ kids are doing the same

The shortfall is in affordable houses, yes. That's one reason why the market has slowed, housing pushed out of reach for the average Joe. Some other reasons being LVR restrictions and less access to foreign credit (i.e Chinese buyers etc).
The current climate looks bad for housing supply increasing, building costs are higher, which would of course push up the costs of even dwellings at the low end of the market, and combined with the slower overall market (talking about Auckland here mostly) there will be less of a payoff.
Time to accept the current reality of the situation developers, the bubble has burst, large profit margins have evaporated, housing is still in high demand, time to suck it up and cut back on the overindulgence.