New Zealand’s housing market isn’t functioning as well as it should be, with higher house prices, rising rents, falling home ownership, and a lack of housing options. But just how large is the housing shortage that we continually hear about? New estimates from Infometrics point towards there being a shortage of about 40,000 homes.
Others have attempted to quantify the undersupply of housing. In July, Kiwibank published a report asserting that New Zealand has a housing shortage of 130,000 homes – a shortage so large it represents almost 7% of the current stock of dwellings. And earlier this month Colliers put out a report about their own thoughts on New Zealand’s undersupply, although their confusion of mixing different population data makes their analysis harder to interpret.
A housing shortage of 40,000, but a lower net undersupply
Our modelling suggests that New Zealand might have a housing shortage of around 40,000. This shortage refers to the cumulative total of all areas in the country that are currently undersupplied.
However, at a net undersupply level, the nationwide undersupply of housing might be as low as 2,500 dwellings. The large gulf between the housing shortage and the net undersupply is due to the oversupply of housing in parts of New Zealand, notably Christchurch.
Both results are heavily dependent on a key assumption about the number of people per dwelling. Importantly, though, there is significant regional variation in housing supply relative to demand. Our estimate of a modest undersupply of housing nationally should not overshadow our view that there is still a sizable shortage of housing in some areas such as, ironically, Auckland.
Auckland shortage, Christchurch surplus
A severe shortage of housing in Auckland is apparent in our modelling, with nearly 30,000 homes needed to meet the current shortfall (see Graph 1). Auckland contributes the major share of the overall shortage of nearly 40,000 dwellings in 2019.
Meanwhile, Christchurch appears to have a surplus of housing, as do several South Island areas, with Christchurch alone contributing over 11,000 of the nearly 35,000 surplus dwellings we estimate might be out there in New Zealand (see Graph 2).
It’s not easy trying to interpret the results. For example, Auckland’s rapidly expanding undersupply between 2013 and 2018 appears reasonable, although if the city still has an undersupply of more than 29,000 homes, why aren’t rents and house prices coming under significant upward pressure? The large oversupply in Christchurch (and, to a lesser extent, surrounding areas such as Selwyn and Waimakariri) makes it look like our model has not made a big enough allowance for the loss of dwellings in the 2011 earthquake. And Waipā is representative of many provincial areas that appear to have had a persistent undersupply during the 1990s that has switched to a persistent oversupply by this decade.
In our view, an estimated oversupply of housing in an area points towards a lack of fundamental reasons why prices should have risen strongly and, in some cases, continue to do so. By implication, it also suggests that house prices are vulnerable to a decline when economic conditions deteriorate. This conclusion carries extra weight for areas where the oversupply has not been shrinking in recent years, even with strong population growth, such as Waipā, Tauranga, and Queenstown-Lakes.
And then there are other areas that appear to be genuinely undersupplied at the moment, including eastern Bay of Plenty, parts of Manawatū-Whanganui, Wellington, and Hawke’s Bay. For these areas, it is easier to justify outperformance in terms of both house price inflation and residential building activity over the next 1-2 years.