Rodney Dickens says there won't be a major catch-up phase for residential building unless something significant is done to improve new housing affordability

By Rodney Dickens*

Conventional wisdom is that there is a huge unsatisfied demand for new housing especially in Auckland implying the potential for a major catch-up phase for residential building.

Such a view is based on only partial analysis of the drivers of residential building.

This Raving first presents the conventional view that leads to the conclusion that over 50,000 additional dwellings are needed to meet the unsatisfied housing demand. The rest of the Raving shows why there won't be a major catch-up phase for residential building unless something significant is done to improve new housing affordability or taxpayers hugely subsidise the lucky group that gets to own government-sponsored new housing.

This report should be viewed in the context of the recent Raving that provided a benchmark for Auckland new housing affordability.

The conventional view is that there has been massive under building

Since 1992 the population has increased 36% while the number of private dwellings has increased 40% (left chart). At face value growth in the housing stock has exceeded growth in the population implying that rather than under building there has been a small element of overbuilding relative to population growth. This is not the conventional view. The increase in the average number of people per private dwelling from 2.53 in 2013 to 2.6 most recently starts to allude to the conventional view (chart below).

In general over time the number of people per dwelling has fallen. A range of factors are behind this albeit not all work in the same direction: rising incomes meaning more people have holiday homes; demographic changes like the percentage of split marriages; the rise of retirement homes as housing options; and changes in affordability. If the number of people per dwelling had remained at the 2013 level rather than increasing, the number of private dwellings would currently be 51,800 higher today. This is the sort of analysis that seems to be done to conclude that there has been massive under building. An alternative perspective is looking at the growing number of people living in unsatisfactory accommodation because of expensive housing (e.g. living in garages, garden sheds and at times even cars/vans).

The fallacy of massive under building

No person or authority has stopped people from building more. The idea of a massive under building is misguiding. In light of all the factors that determine the level of building, including new housing costs, what has been built largely reflects demand. This isn't the same thing as saying there aren't lots of people living in unsatisfactory housing conditions. But in the world of demand and supply what has been built is what has been demanded at the going price. The obvious implication is that there will only be a major catch-up for building if there is a major reduction in new housing costs or if there is major government intervention which is largely the route we're heading as a result of the failure of the government's policies to deliver more affordable new housing as touched on in the recent Raving that provided a benchmark for Auckland new housing costs.

The chart to the left shows the increase in my estimate of the average national house and land package price versus the increase in the average employee's gross annual income since 1994. It is just the starting point for looking at the issue of housing affordability. Since 1994 my estimate of the average house and land package price has increased 248% while the average employee's gross annual income has increased 101%. With new housing costs, like existing house prices, increasing much more than incomes, people are making a rational choice in economising on housing (i.e. more people per dwelling on average by a range of means including children staying at home longer, people taking on borders, people living in garages and elderly people and others moving in together).

As has been documented by the likes of the Productivity Commission and others, rising section prices much more than rising building costs are behind the increase in new housing costs as shown in the adjacent chart. Since 1994 the median section price reported by REINZ has increased 389% versus a 192% increase for the average cost per square metre of new dwellings based on the building consent numbers.

In this context, Labour's plan to dump the Auckland urban limit and fully debt fund new infrastructure for residential developments - assuming that policy has survived the change of leadership - offers a better chance of getting down section costs than was ever likely to be achieved by the Housing Accords and Special Housing Areas favoured by National. Most likely in response to Labour's KiwiBuild plan (i.e. build 100,000 "affordable" homes over 10 years), National has announced plans to "ramp up" the building of "social, affordable and market" housing by Housing NZ (e.g. 34,000 new dwellings in Auckland over a 10 year period and smaller plans for some other parts of the country).

What is described as "affordable" by both parties; isn't. Without the policies needed to get down section prices and to some extent building costs the only way there will be a significant increase in building is by taxpayers subsidising the people getting access to government-sponsored new housing or via building ticky-tacky boxes. Without land or other subsidies that make new housing genuinely affordable there won't be the demand to satisfy the announced building initiatives by National or Labour. As a taxpayer I much prefer policies that genuinely improve new housing affordability over those that involve taxpayer funded subsidies to the lucky few who make lots of money from being offered new housing below actual costs.

Low interest rates are disguising the extent of the housing affordability problem

When current super low interest rates are taken into account the housing affordability problem is nothing like that suggested by the massive increase in house and land package and existing house prices relative to incomes, but there is still major cause for concern. For the average employee buying the average house and land package price with 80% debt, the interest cost to fund that debt as a percentage of gross annual income is around historical average levels (blue line, left chart below). This is because interest rates are well below average. The major fall in interest rates - blue line, right chart below - has largely offset the massive increase in housing costs relative to incomes in terms of interest costs to service debt on new housing. An implication is that interest rates will have stay low or the proverbial will hit fan.

The story is very different when we look at deposit and debt levels as multiples of income. In 1994 the average employee required 1.2x gross annual income to have 20% deposit/equity to buy the average house and land package but this has now increased to 2.1x (black line, left chart below). Similarly, in 1994 80% debt to buy the average house and land package was 4.9x annual gross income versus 8.5x now. These multiples make for ugly reading (i.e. NZ has a major affordability problem).

*Rodney Dickens is the managing director and chief research officer of Strategic Risk Analysis Limited.

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No person or authority has stopped people from building more. The idea of a massive under building is misguiding. In light of all the factors that determine the level of building, including new housing costs, what has been built largely reflects demand.

How to contradict yourself in 3 sentences.

Auckland Council has elevated costs, therefore Auckland Council has stopped people building more.

Wrong, Auckland council has reduced the demand by increasing the price.

Right, Auckland Council has reduced the demand by increasing the price.

Actually skudiv, you're wrong. Auckland council doesn't impact demand, it impacts supply. The VOLUME DEMANDED is reduced, the actual demand is unaffected.

You are both right. By elevating costs Auckland is very likely to have a sustained reduction in supply and demand. Which means the long-term prospects for Auckland property is scary. This city could become a lovely place with great schools and lots of parks, but a cost driven population exodus as other places just continually grow faster. Auckland of today could become the Adelaide of tomorrow.

In economic terms what Auckland Council (zoning) and Central government (infrastructure) have done is restrict supply i.e they have changed the slope of the newly built housing supply curve to be steeper and more inelastic. The demand curve hasn't changed but the new equilibrium point is higher up on the demand curve i.e. at a higher price and lower quantity point.

That only applies if demand is held constant, which is an artificial constraint. Demand of a product falls when substitutive goods are produced more efficiently. And when it comes to housing everywhere is more efficient than Auckland.

It appears you're confusing demand and effective demand. The demand for decent housing hasn't really changed. Those aren't iron rules Unaha-closp. People often are forced to accept an inferior substitute for something that they'd like, but don't have the means to pay for. Like the people being forced to live in cars, garages, hostels, boarding houses, holiday parks, caravans, substandard housing or on the streets.

i dont see the contradiction...??

he says.. " in light of all the factors..."
To me, he is implying that if people can't afford to purchase a new home.... then few will be built.
ie.. he is saying that what is being built at the moment actually meets the demand. ( unaffordable to most )

ie... the solution is NOT about "building more" ..., its about making a home "affordable".. ( Waymad has told us how to do this )... Once the price of a new home is "affordable", we might be surprised to see that more are built..? ... as far as I can tell.

If you listen to the political rhetoric.. it is all about the numbers of building consents that seems to define success for them..??

I agree with the 2nd and 3rd sentences.

But Auckland Council has for no good reason made land very expensive in Auckland City, by reducing the volume of suburban land supplied to Auckland City about 40%. Which means by the logic of the 2nd and 3rd sentences there is very much an authority preventing new houses from being built. Hence the contradiction.

"Auckland Council has elevated costs, therefore Auckland Council has stopped people building more."

Rephrase that and it may change your perspective to Roelof's.

Auckland Council has elevated costs, therefore Auckland Council has prevented more people building.

Hence why the demand curve slopes downwards.

I think we have tried somewhat to address this with subsidies such as KiwiSaver, Welcome Home etc. But naturally we are now at the point where the returns to effective/artificial price discrimination are decreasing as the price inflation has remained unabated.
Hence, Rodney's point. We're at a stage where the low number of people with WTP at market rates is resulting in low output of housing.
It doesn't matter how much more demand we have at prices below current market prices (hence why I have for so long said that our current immigration profile doesn't substantially underpin prices), all it does is change the convexity of the demand curve. It will not increase the output of new houses until we increase our ability to pay or increase the amount of demand with adequate WTP.

I also don't see a contradiction
Can we be pals now Roloef ? Ha!

What housing crisis?

Interesting graphs, we were doing ok until about 2006
What happened, try this for size from statistics NZ
The negative net PLT migration of the late 1990s continued in 2000, with PLT arrivals still at lower levels than departures. However, this reversed the following year, with the net outflow of 11,300 in 2000 becoming a net inflow of 9,700 in 2001, then 38,200 in 2002. This inflow was driven by the record arrival of 96,000 migrants, as well as a relatively low number of PLT departures (57,800).
Many of the new migrants in 2002 and 2003 were international students arriving in New Zealand to study. Reasons for the rapid growth, especially in Chinese students, included New Zealand’s reputation as a safe country to study in, the lower New Zealand dollar, more interest from Chinese in gaining Western tertiary qualifications, and New Zealand’s comparatively open immigration system (Ministry of Education, 2009).
Enrolments of international students, especially from Asia, peaked at 126,900 in 2002 (Ministry of Education, 2009). As some of these students were arriving for less than 12 months, they would be counted as short-term arrivals, while students already in the country would not be counted in migration data. The main net PLT inflows in 2002 were from China (14,700) and India (6,600), with the United Kingdom in third place (5,900).
By 2005, the net migration inflow had eased to 7,000. The United Kingdom once again dominated as the main source country, with a net inflow of 9,600. There were lower net PLT inflows from India (1,900) and China (1,100), attributable partly to increasing competition from other countries keen to attract international students (Ministry of Education, 2009).

Notice how many times the Ministry of Education was quoted.
Our building industry is a good little craft industry overwhelmed by a population influx, its not to blame for anything and trying to change it is ridiculous.
Time to close down the education scam.

I agree that the housing industry in its current form only has a limited capacity and can only flex within certain boundaries. This has worked fine for many years until population increased beyond the evolutionary limits of the industry. See more here

If we want immigration at this level (another question that I won't go into here) then we need to revolutionalise the building industry to allow it to scale quickly.

NZs building industry is really just like a cottage industry
Lots of small players lacking scale
Throw in the building supplies duopoly and you have cost elevation from the start
Throw in the price of a fully serviced section in Auckland and you triple the cost elevation over other cities in this world to build in.
All there ever seems to be is talk & meetings from this National government
The only people National has appeared to appease are the spruiker class which lets face it are Nat party types into only self interest .

Exactly, which is why NZ needs the government to enter the market. Not to provide subsidised housing, but to provide competitive housing built at scale for ordinary people (so not massive McMansion aimed at the top end of the market), to create a new 'normal' for the industry. Obviously for Labour to achieve this they need affordable land -which is why they have a policy around reducing land-use restrictions and providing debt funded infrastructure has also been announced.

O,well there not much the government can do about anything over the next 2 to 4 years, housing dept is extremely high, the big money from overseas investors are gone, local investors and flippers gone, interest rates already very low so not much help there with drops , FHBers the only ones left which normally only buy the cheaper market and even that's to high for that very small % of buyers, 2008 all over again but nz made and 10 times worse, 2008 interest rates were 9% so could drop and DTI can't have been as bad as Auckland now, 2008 was mild because it wasn't nz made, new homes don't get build in a crash, people make do with what they have and renovate, or move on to brighter lands and It become a buyers market

Housing crisis is when a house that sold for 480K in 2004 is sold for 850K in January 2015 and sold again in October 2016 for 1.2Million .
Now valued at $1.195million ( In a west Auckland street )
Auckland property has risen completely out of whack with true demand need
Auckland property has been used for speculation by foreigners using their surrogates as pawns who are resident in NZ.
Why the haplessly stupid National government choose to say otherwise is an indictment on their own incompetence to govern.

Ah, but you see, the 2004 owners had a household income of $80,000 whereas we're sure that today's owners have one of $200,000......(NB: More likely it's gone up to half that!)

It's a good piece by Rodney - much better than Eaquab - and this is right on the money:

'Without the policies needed to get down section prices and to some extent building costs the only way there will be a significant increase in building is by taxpayers subsidising the people getting access to government-sponsored new housing or via building ticky-tacky boxes.'

The reference to "Ticky-tacky boxes' is unfortunate though. Prefab housing can be realised in a very attractive manner, lots of great examples from Scandanavia, Japan, North America.

Prefab can be used to reduce costs. If the government just want to build the cheapest house possible then a poor quality house can be built quicker and more cheaply via prefabrication. This is the belief referred to above.

All house types can be prefabbed right up to extreme high-quality builds (in fact, to reach the highest quality normally requires prefabrication to some degree). Most new hotels are now built this way.

In the coldest parts of Scotland they build prefabricated homes of over 3000sqft which were so well constructed
and insulated that the cost to heat them was £15 per month !
Nothing built in NZ today can match that
Sadly the sort of prefabricated homes kiwis would get will be nothing like this standard

We all know that not enough houses being built has resulted in elevated prices, more debt, more interest, more rent which can only be described as dead money (a tax) on hard working individuals! Then let's include higher insurance premiums and maintenance costs! Once we remove capitol gains from the equation as we enter the avalanche of fresh springtime listings, it all bubbles to the surface, leaving us all ever more exposed come the next crisis on the horizon......

The article doesn't confirm that "not enough houses [are] being built" .... it is saying that not enough of the *right* kind of houses are being built.
More McMansions are a blight on the future prosperity and liveability of NZ cities (especially Auckland). We need more affordable and more dense housing.

Yes, where is the medium-density housing? If you want to graduate beyond an apartment but have limited funds, your only choice is a standalone house a long commute away from the centre. I know many would prefer a terraced or duplex on a smaller section closer to town and a shorter commute.

The extremely high cost of a fully serviced Auckland section dictates that only a McMansion can justify the price of the golden land it is built on

"We all know that not enough houses being built has ....." You mean, as Rodney points out, We Assume..... The question arises - then how many of the houses in Auckland are empty? This has been discussed but I do not recall any figure that has some substance being mentioned. How much land (residential housing) banking is going on?

Retired poppy,No we don't know that not enough houses being built has resulted in elevated prices, after the GFC of 2008 from 2008 to about 2012 house prices didn't hardly go up at all and there wasnt enough houses being built then, Aucklands houses starting going up when the hole country start taking about the auction rooms being full of overseas people buying everything in sight and locals saying "I'm the only local left on my street or every second house is empty, making NOW not the "next crisis " this is the crisis, there hasnt been enough houses built in Auckland for many years , you could say from the time of labour 2002 to 2008 boom, through the national 2008 to 2012 down turn, through the national 2012 to early 2017 boom and now the 2017 to -------- , crash, normal cycles , with normal excess of dept with incomes to low for housing, I can see this housing supply drama going on for years , we need to blame something I guess , blame the people put up by the government in hotels because they can't live in Auckland anymore because everything is to expensive and the houses they were in were taken away because of greed, the rich get richer the poor get poorer, government policies, stupid, vote for change and Jacindas got a nice smile

Ok , Ill try again.
There are about 120,000 international students in NZ, 60% in Auckland.
Thats 80,000 beds or maybe 30,000 home equivalents.
Whay does that number sound familiar.....?...

Some great info here with these graphs, however I can't help but feel that the writer's conclusions are a bit off. He seems to suggest that the number of houses built was all that was demanded. Of course, basic economics reveals a demand curve where demand increases as price drops.
So how do we know whether there has been massive under building? The writer argues that there hasn't been under building because the number of people per dwelling is relatively the same over the long term, taking into account other factors. I would argue that the proof of this question also has much to do with his other graph showing what people are paying for a house, i.e. instead of bunking with other families, people who can afford it are biting the bullet and mortgaging themselves to the hilt to be able to afford a house for 2.6 people. This suggests to me that there is massive under building, as more supply would move us further along the demand curve to a lower price point.

On a cost to value basis the exurban developments that Auckland Council sponsors are likely to perform well above Auckland central for the foreseeable future. Wellsford, Warkworth, Pukekohe, Huapai, Riverhead and Orewa - all these places are to be provided with extensive oversupply of land under the Unitary Plan with infrastructure paid for by Auckland, making them much lower cost than normal circumstances would allow. The central city is undersupplied with land so building there is crippled by elevated costs.

Now obviously this whole set up makes no economic sense and has been planned by Auckland Council (but I repeat myself). The places favoured for greatest growth expansion are places with the smallest economies to facilitate that growth and the place with the greatest economy of scale is subjected to elevated costs to prevent growth.

its very simple - work backwards. based on the average salary, interest rates (long-run) with a deposit of $x, and a mortgage of $y, where should entry level housing be priced.

Back of the handkerchief calculations point to the fact that, land is too expensive, as are compliance costs, as are materials all things being equal.

Across the Tasman you can buy brand new brick and tile close to the main centres for $550k

Not so in Auckland.


In Sydney today. A work colleague is recounting how his Mother-in-laws place just went on the market and has offers $300k over guidance and closing in on $2,000,000. He's early 40s on a good income and can only afford to rent. Something's not adding up if he can buy a house for $550k.

I doubt$550 will buy you a house anywhere near Sydney or Melbourne but it will in Brisbane -a bigger city than Auckland with better transport infrastructure. I believe that already 200,000 kiwis have made the move.....

And they saw the light....

Mirvac to pioneer build to rent sector.
Mirvac is taking the plunge into the long hold sector, an established asset class elsewhere, so far thought to be too difficult in Australia. Build to rent is thriving in the US and in Europe but is a new asset class in Australia. The US market known as "multi-family" has been in place for 40 years with 250,000 units completed each year. The UK has followed suit and now is in its fifth year of delivering build to rent projects. The expected total project investment value is $1 billion over time, in major capital property yield of greater than 4.5 per cent. Over the longer term, a forecast 10 year un-levered stabilized return of more than 8.5 per cent is expected....Under the build-to-rent model, institutional groups lease ( the new-builds) on a long-term basis.

Is a single bedroom apartment considered a dwelling, because if so the most they can house is 2 people, and some are only suitable for 1 person, if that...
I suspect over this period far more of these types of small 1-2 person dwellings have been built, which skew the figures.

It is ironic that NZ once the land of the 1/4acre section builds apartments so tiny they are only suitable for 1 person . Regression

The thing is that NZ is supposed to be improving living conditions as we become more wealthy as a country. But as NZs debt is so high, especially private debt, and a lot of that is due to buying overpriced houses, so I really wonder if NZ is better off , or worse off.

Sidebar to the discush:

Why did prices and them Graphs all take a leap around 2002-04? Try Welcome Home Loan introduction as a Universal Pricing Signal: my own experience is recounted here:

Good Intentions.....road to Hell ..... paving contractor.....

Looking at the graphs the trend started about 2004 and welcome home was starting to have impact about 2008, a four years later.
Net annual imigration hit 30000 in 2002, historically it had been 20000 but had been negative for a long time.
But relaxing lvr certainly helped.