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."