New estimates showing much lower levels of migration have probably reduced the size of Auckland's housing shortage but it hasn't gone away

New estimates showing much lower levels of migration have probably reduced the size of Auckland's housing shortage but it hasn't gone away

By Greg Ninness

A change in the way long term migration is measured has resulted in a sharp decline in the estimates of how many migrants are settling in New Zealand.

And with fewer people coming here to live, it has also cast doubt on the extent of the housing shortage, particularly in Auckland where housing pressures from migration-driven population growth have been greatest.

While it would be nice to think that Auckland's housing shortage was nothing more than an urban myth, a close look at the new numbers suggests otherwise.

The new, lower migration figures suggest that Auckland's housing shortage may not be as severe as previously thought, but it is still likely to be substantial. has been estimating the size of Auckland's housing shortage for several years, based on the natural increase in the region's population (the excess of births over deaths), the net gain from migration (the excess of long term arrivals over long term departures), average household occupancy and the number of Code Compliance Certificates issued for new dwellings in the region each year.

That data is summarised in Table 1 below, which shows that over the four years from 2015 to 2018, an accumulated shortfall of 27,206 homes built up in the Auckland region, which suggests the total shortfall would be much higher.

However Statistics NZ has revised the way it collects migration data, and this has shown a big drop in the number of people settling in this country on a permanent or long term basis, compared to the previous method.

The differences are summarised in Table 2 below, which shows that under the old system, Statistics NZ estimated a net migration gain of 58,259 people in the 12 months to June 2015, but under the new system, that figure was revised down to 53,208, which means 5051 fewer people (-8.7%) settled here than originally thought.

Table 2                           NZ's Net Migration Gain
Old Statistics NZ estimates compared to new estimates
Year to June Old estimate New estimate Difference % Change
2015 58,259 53,208 -5051 -8.7%
2016 69,090 63,773 -5317 -7.7%
2017 72,305 58,625 -13,680 -18.9%
2018 64,995 46,634 -18,361 -28.2%

As the table shows, that variation got greater each year. In the 12 months to June 2018, the old system showed a net gain of 64,995 compared to just 46,634 under the new system, or 18,361 fewer long term migrants (-28.2%) under the new system.

That would almost certainly have reduced the size of Auckland's housing shortage, but by how much?

Unfortunately the revised migration data is only available at the national level and the regional data still in the pipeline.

However we can get a rough idea of how the Auckland numbers might be affected by reducing them by the same percentage changes that applied to the national figures.

In other words, because the national net gain from migration was 28.2% lower under the new system compared to the old one for the 12 months to June 2018, we'll assume the Auckland figures were reduced by the same amount.

That produces a rough measure, but at the moment it's the best we have.

Table 3 below shows the effect those rough estimates would have had on the calculations for Auckland's housing shortfall from 2015 to 2018 (June years).

In the year to June 2015, the housing shortfall declined from 8919 under the old system, to 8075 under the new system and the following year it declined from 8036 to 7246.

The differences were even more apparent over the next two years, with the shortfall for 2017 dropping from 6817 under the old system to 4996 under the new system, and in 2018 it dropped from 3434 to just 1027.

By that measure, the accumulated housing shortfall that built up in Auckland over the four June years from 2015 to 2018 would have declined from 27,206 under Statistics NZ's old system of migration measurement, to 21,314 under the new system (-21.7%).

So Auckland's housing shortage has not gone away, it's probably just around 20% smaller than we thought.

What's even more interesting are the trends that the figures highlight.

Both sets of numbers show that the net gain from migration has been slowing while Code Compliance Certificate issuance has been increasing.

As a result, the annual shortfall has been decreasing and the new figures show that for the year to June 2018, the annual shortfall was just over a thousand homes.

Given that the figures are now more than six months old, and that in the second half of last year the net migration gain continued to decline (whatever system was used for the calculations), it is quite likely that Auckland's housing shortage has flattened out and may even be starting to decline.

That doesn't mean a surplus of homes is is likely to appear over the horizon any time soon, because the accumulated shortfall will keep the Auckland housing market extremely tight for some time.

But at the least it shouldn't be getting any worse and pressures may even be starting to ease.

Although our calculations are just rough estimates, they should be reliable enough to give an indication of the broad trends in the Auckland housing market.

And we'll continue to update our figures as more reliable data comes to hand.

Table 1.    Auckland's Growing Housing Shortage   -  Year to June 2015-2018 Based on Statistics NZ's Original Estimates (Old format)
Year to June  Natural increase in population Increase from net migration Total Increase in population Estimated no. of new dwellings needed

No. of new dwellings completed (CCCs issued)

Annual housing shortfall Cumulative housing shortfall
2015 13,900 29,100 43,000 14,333 5414 8919 8919
2016 13,500 30,800 44,300 14,766 6730 8036 16,955
2017 13,800 28,900 42,700 14,233 7416 6817 23,772
2018 13,000 25,600** 38,600 12,867 9433 3434 27,206


Table 3.    Auckland's Growing Housing Shortage   -  Year to June 2015-2018 Based on Statistics NZ's Revised Estimates (New format)
Year to June  Natural increase in population Increase from net migration Total Increase in population Estimated no. of new dwellings needed No. of new dwellings completed (CCCs issued) Annual housing shortfall Cumulative housing shortfall
2015 13,900 26,568 40,468 13,489 5414 8075 8075
2016 13,500 28,428 41,928 13,976 6730 7246 15,321
2017 13,800 23,438 37,238 12,412 7416 4996 20,317
2018 13,000 18,381 31,381 10,460 9433 1027 21,314

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A surplus of homes on the fringes of the city with poor transport and requiring hour-long commutes are inexcusable while intensification continues to be blocked in well-off inner city areas that have frequent transport options.

It's a cockup well and truly, who is the genius responsible for it? What, if anything should be done such as relocate and intensively develop the city golf courses?

As a rule of thumb you always regret removing green space from a city (OK not if you are a developer). It is very rare to have green space returned.
Agreed the short-sighted idiots who failed and are still failing to build and maintain a backbone of rapid public transport are handicapping Auckland.

Surely there can be a win win. Develop 40% of the golf course land area intensively, retain the balance as high amenity open space.

Like it or not, golf courses are massive water-catchments and soak-holes - if you think you have flooding problems now (due to infill developments) and flushing sewage down to the foreshore - and you don't mind - then go for it - cannibalise the golf courses

New builds require stormwater detention tanks almost everywhere in auckladn now anyway, so it won't make much of a difference.

With the rain we've been getting (e.g. December 2018), they just all overflow.

We live on the side of a hill, with newish houses up the back. They all have detention tanks, and they take about 3 mins of heavy rain to fill, and then the water just overflows like it wasn't there.

Hard to replace what nature does for free.

Sure, same as what happens when the soil is already waterlogged from previous rains, or the soil is clay.

It's not the golf course that are the problem, it's the inner city "character" suburbs that have locked out intensification despite having a monopoly on a gold plated frequent transport service.

This is true, but personally if there is going to be green space locked up for reserves in a city golf courses are one of the most wasteful uses. Almost any other sort of park/recreational space is more heavily utilised. Compare the number of people that visit Western Springs with Chamberlain Park on a daily basis. Next down the list after that would be racecourses.

Yeah but...even if you rezoned, development would be really really slow given the fragmentation of land. Mass apartments on golf courses would get much bigger and quicker gains.
I’d also like to see Eden Park bowled and replaced with thousands of apartments

Fritz so you end up with 60% of the green space amenity. Then you do it again and 36% amenity and again for 21% amenity. Meanwhile every amenity needs an ever larger car park for the increasing population to visit the ever declining amenities - I can supply a list for local North Shore parks.

A Very small minority of Auckland's population use the golf courses. They would be a much more valuable community asset if they were part developed with the balance open to the community for walking, cycling, mingling

I'm only against building on them. Use them any way you like.

Have you noticed properties with a sea view are worth more even when there is no direct access to the sea (mangroves or clifftop). Why is a view worth money? Not so much what you see but what you don't see - other buildings. Space and especially green space has value even or maybe especially if you can't use it - think of an invalid in a wheelchair - they usually would prefer to view an intermittently used beach or playing field or golf course than be stuck looking at a car park or another house.
All cities need their lungs; Auckland is blessed with plenty of green space - please keep it.

Erect a giant mural on your boundary then you wont see other buildings. You can even change the mural intermittently for a different view Lapun

No problem for me, nearest golf course 5km away and well out of sight. But the effect of views of nature have been proved to help medical recovery so it is a genuine effect. Similarly look at how property is valued internationally - Auckland is lucky to have numerous parks so it is not as dramatic here. When I lived in New York a property overlooking cenral park was worth millions more than the identical property facing the othe way and when I lived in London the houses that faced Victoria park were worth double those one street back.
Value your green spaces - it is so easy to lose them and so difficult to get them back.

But bulldozing large parts of the outer surburbs due to forcing development out into the far reaches of Auckland is somehow fine. and the connecting roads, and the air pollution from the commuters? What about the health effects of people forced to sit in cars on congested motorways for an hour each way sucking exhaust fumes?

Lets do a little maths. Assume half of North Shore is housing and the other half golf courses. We can double the population by building on the golf courses and we have the kind of life that suburban London and New York have - rows and rows of houses. Or we could knock say half the stand alone houses down and replace with terraces - that would more than double the population or consider apartments especially for the growing number of elderly. That way the population could increase say five fold without removing any green space - just increasing the numbers who can use it.
Come to Northcote and see Panuku doing exactly that. Housed have been flattened and apartments are going up but the Greenslade reserve is untouched.

Let's not forget that the subsidy of golf is greater than the subsidy of public transparent. And while we are at it - golf clubs have large wire fences to stop the people who actually own them from using them - reserving them for a narrow elite group.

I don't agree that losing green areas is quite the threat you see it as (especially if it not publicly available). However, even putting five schools on the land that is held for Remuera golf club alone would result in so much more land available for kids and sports fields.

I bet Remuera golf course is elite. But on North Shore the only golfer I know is my wife's aunt and she plays golf despite having only a pension income and owns no property.
If you let the council nibble away your green parks (a) you will get older and regret it (b) you will lose something that makes Auckland (and most of New Zealand) special.

It's very sensitive to the assumed number of ppl/house. If using 3ppl/house as shown above we are falling further behind, but if you assume 4 ppl/house for immigrants and 3 for the established population we are about keeping up with new demand and just need to clear a (much smaller) backlog.

Very informative read Greg, cheers. Would be good to see a graph of Auckland’s estimated shortfall overlaid with median price if we had more data. Also, I agree with what Rodney Dickens wrote last month and I’m not convinced that the Stats NZ model is Kosher

And this reflects on kiwibuild, which, while far from perfect would definitely have performed better in times of rampant house price inflation, such as we had when the idea was come up with.

The answer, of course, will be to clamp down on development until that pesky misestimation has been normalised.

From recall, Interest based the previous shortage by assigning a higher percentage of migrants to the Auckland region (particularly those that had not given a destination on their cards.) The new figures are based on an equal percentage basis.Fair enough that a regional breakdown is not included at present , but it was not before. Using 3.0 as the average for Auckland is incorrect.A decimal point here or there when viewed in totality matter. At the end of the day unless your assigning limbs and body parts , individuals usually come in whole numbers . More migrants will rent initially, so the composition of new migrants( population ) is important. A family of 4 or 5 will only require 1 house. Equally a large number of students , particularly in Auckland will stay in home stay accommodation.No account has been taken for internal regional movement The shortage is getting shorter

Under the previous system if you said on your arrival card you were staying for 12 months or more you were a migrant. Now, under the new system if you arrive and depart 11 months and 30 days after your arrival you are not a migrant even if your original intention was to stay for 12 months plus 1 week

It appears the arrival card system encouraged arrivals to state 1 year or twelve months

If you only stay 11 months instead of 12 months you don't count - you don't exist - you don't need anywhere to put your head down and accommodate yourself

Tourists staying in motels, campervans, or staying with relatives don't require permanent residential accommodation. They feed demand for commercial accommodation providers, a separate category of accommodation.

Maybe the special housing areas weren't such a bad idea after all, they got a lot of development happening and didn't cost the government a cent. While kiwibuild is set to give big handouts to big corporate builders and not actually build any extra houses. As much as I hated JK, he was a genius compared to JA.

“kiwibuild is set to give big handouts to big corporate builders...”

What are you referring to here? You think the government is going to have to pay out for underwritten houses that don’t sell for the agreed price?

Its semantics. The fact you are staying long or short term shouldn't affect your need for a house, flat or unit, it just means you will use it for a longer or shorter period. Also consider air bnb and similar using up capacity. Auckland presents a unique scenario among the rest of the country's towns and cities in that its far more attractive to immigrants due to its economic momentum which just exacerbates the pressure on housing. I note with dismay that a refugee run NGO has had the barefaced cheek to chastise the government over refugee settlement policies that see them settled (safely, and at our expense I might add) in the provinces where regional economies can benefit from our accepting them into our Country. What more can we possibly do for you?

“More than 33,000 houses in Auckland were officially classified as empty in 2016.”

I would imagine the number could easily be somewhat larger now.

Something of a nice fit with Greg’s shortfall numbers either way.

Not sure what you can do to get them back into the pool and actually lived in – Vancouver tried the stick, maybe introduce a carrot?

Or forget about it and simply continue to build build build!

Yep, the last bit - keep building. A good chunk of the 33,000 houses are the family bach in out of the way places like Awhitu, Pakiri etc, so expecting to move people out there and commute daily to wherever work might be is asking for increased road toll, increased congestion and people who's quality of life doesn't actually increase much once you factor spending 2-3 hours a day driving to and from work, and the costs of running the car..

“And we'll continue to update our figures as more reliable data comes to hand.”
This will be interesting, considering Sydney and Melbourne also had a shortfall and built, built, built, and then, oops... Now an average 22-23% price decline in parts of Western Sydney with no sign of the speed of decline slowing.

Nah all they need is a few more Opal Towers to push the shortfall up.

Supply was not the only and main issue as lied by National givernment who supported and promoted the so called HAPPY CRISIS.

Demand side has to be tackled on two front, first was restriction on fireign buyer/money laundry and second is Tax - negative gearing and No capital gain tax in any form. Once this issue is addressed houses will be for living and housing market will not be another casino that is exactly what happened under National. Will be hard to impliment tax reforms as most people in charge of deciding and so called experts and media all have vested interest as reaping the benefit of NO TAX at all wheras every person who earns even a dollar has topay some tax wheras rich gets away by making hundred of thousands in the name of providing houses to those who cannot afford it - social justice.

"Don’t have a negatively geared investment property? You’re in good company. Despite all the talk about negatively geared nurses and property baron police officers, 90 per cent of taxpayers do not use it."

It's not real unless it's written in the papers -and it is! Although, admittedly, not ours, but still...

"Ultimately, the winners from the change are the 89 per cent of nurses, 87 per cent of teachers and all the other hard-working taxpayers who don’t negatively gear. Winding back tax concessions that do not have a strong economic justification means the government can reduce other taxes, provide more services or improve the budget bottom line."

I am sorry, but the poorest person who earns just a dollar, receive much more in benefits that anything paid in tax. So the argument that the poor pay tax is simply wrong. True, their incomes are miserable even with the little help from government. But they pay no net tax.

Capital gain tax is fine, as long as it means less tax on income from labour (i.e. neutral). But tax streams from capital gains are a hell of a lot more volatile than tax from income. Also, capital gain can turn into capital loss!

This would mean that governments budgets will be lot harder to balance and predict. So it is unlikely that any government will significantly change the income tax as it stands.

Capital Gain Tax with some exception (family home or may be small business) should be enforced.

Any Investment should be taxed (How much and what can be debated) but just like wages and profit from business and profit from investment should be taxes.

The big assumption in these calculations (other than the accuracy of StatsNZ) is the number of people per dwelling. Reverse engineering the math shows the assumption is 3 per dwelling. Change this to 3.5 and you are actually currently built more houses in 2018 than the annual need so the shortfall would be shrinking. Run this number through all the years and your shortfall is even smaller. Not sure if there is any good data to check this assumption?

Update: Did the math

Population Increase Est. no. new dwellings 3.5 person per house New Dwellings Annual Shortfall Cumulative Shortfall
2015 40,468 11,562 5,414 6,148 6,148
2016 41,928 11,979 6,730 5,249 11,398
2017 37,238 10,639 7,416 3,223 14,621
2018 31,381 8,966 9,433 (467) 14,154

With respect to existing dwellings and population,
1) the current population of Auckland is 1,656,000
2) the current number of residential dwellings is 554,000
3) that is 3.00 people living in each dwelling on average.

Let say that there are changes which result in an average of 3.1 people living in each residential dwelling in Auckland (such as unaffordable prices to buy or unaffordable rents), then you have a excess of housing. (1,656,000 / 3.1 = 534,194 residential dwellings required vs the current 554,000 - resulting in an excess of housing of 19,806 dwellings)

As the above highlights the housing shortage or excess is extremely sensitive to the assumption on the number of people living in each residential dwelling.

How many new born babies have you seen out buying houses recently? So what does natural population increase have to do with immediate demand for housing? But far more importantly, net migration is not just about what is happening internationally. Stats also have a model for domestic migration, but with only 1 published census data point over the last 13 years, this model must also be getting pretty dodgy. My bet is their next revelation will be their under-estimate of the retiree exodus from Auckland. Bye bye housing shortage. This would explain why listings (supply) suddenly fell into balance with sales (demand) the moment speculators left the market, freezing price rises. It would also explain why rents didn't explode along with sales prices. Sydney-sized house price falls, here we come.

I was thinking the same thing about babies buying houses - really need to look at a histogram of the age of the population and see if there are more 18-22 year olds leaving home vs. babies being born. The demographic is important with how boomers fit in - regarding retirement. I would think with the recent cost of housing/rent more people are living with their parents longer and flatting with more people to make ends meet.

Blinded by the numbers.

Considering that finding out the housing shortage is less than expected has not suddenly made housing that much more affordable highlights that fact that the un-affordability of our housing has not a lot to do with the numbers.

It's all about how we go about it, ie it's systematic. The shortage is not in the numbers per se, it's about how our land and housing is expensive to develop and build, irrespective of the number.

And that is why the likes of Kiwibuild was always going to fail. Just saying the target was 100,000 houses did not make the first houses anymore affordable.

The shortage is affordable houses and you address this with the number One, ie work out what it takes to build one truly affordable house and multiply it from there.

But somebody is buying the houses so it can’t be all that bad right? Low interest rates have made houses more affordable to those who already own property, and pushed home ownership out of reach for those who don’t. Those who already own property can leverage a deposit from their existing equity and provide a roof for those who struggle to save a deposit.

While these look nice and appealing, they are only 50 sqm and no garage and priced at 8k per sqm. In a west side Hamilton suburb....that is a ridiculous also drags the cost of secondhand into the stratosphere. When land is 500/sqm and build cost approx 2000/sqm plus landscaping a flat section that's 2500 to 3000/sqm in total, it seems a big jump from 3000 to the selling price of 8000 per sqm. Maybe developer profit?

What really sells it for me is the rendered graphics. The dude with the green shirt and the backwards cap, the solo mum pushing the stroller late at night, it's very hip. Although i'm not sure putting a 4 foot high automatic gate at the driveway makes it a "gated community".

This stunning new development features 24 hard-to-find contemporary townhouses for the savvy investor, even with 100% leverage.

I'm in!

Regarding the cost of land

From the Irish property bubble. As construction of houses was expanding, there were speculators buying plots of farmland on the fringes with a view of selling the land to other land speculators or land developers.
1) As a result the prices of farmland got to speculative levels which ultimately led to higher costs for land developers.
2) as a result, this led to higher prices for sections,
3) this then led to an increase in the total cost of construction for houses (when including the land component).
4) and ultimately led to higher sale prices for new houses.

"In 2007, Irish farmland prices were the highest in Europe at Euro66,000 per hectare. ... It was ten times the value of similar land in Scotland and six times more than the same fields would be worth in England.

There was no relationship at all between the astronomical price of farm land and the amount of money that could be made from actual farming. What was driving the increase was a mixture of speculators buying up land for potential development and farmers enriched from sales for public infrastructure projects looking to replace the fields they had sold."

Some anecdotal evidence of land speculation from a mortgage broker. I think he is referring to Auckland.

"I’m also seeing a few speculative land bankers come unstuck. Rule one of the speculator’s handbook should be to not leverage unproductive / unconsented land when liquidity disappears.

For a few years we had speculators flipping land for ever increasing and ridiculous prices. I saw one deal this week with $4.2m of lending and an inability to service the debt from income. Although the owner is a resident, I suspect the beneficial owner is overseas and was the final player in a game of pass the parcel. They simply won’t be able to sell it in this market for a price that works."


[ deleted. Awful racism. Final warning. Ed ]

From a property investor forum

How you can have a housing shortage and a fall in property prices at the same time.

The above article calculates the housing shortage in Auckland.

Note that this is underlying demand for housing in Auckland. Factors which impact effective demand (on which the market prices of residential dwellings are based) are not accounted for.

Note that for the basis of this calculation for the housing shortage for underlying demand, no adjustment is made for changes in demand due to changes in house prices.

The calculation of underlying demand is used for the purposes of long term town planning, and infrastructure needs (such as sewerage, parks, roads, schools, etc) due to an increasing population. Underlying demand is not useful for estimating future property market prices.

For example, the housing shortage number calculated for underlying demand would remain unchanged in the following 2 extreme situations, (assuming current household incomes, population, population growth & the same number of residents per dwelling).

1) if the current median house price in Auckland was $10,000. In this case there would likely be a huge increase in the number of active property buyers which would increase effective demand (and would be above underlying demand). People who were not owner occupiers would buy at this price. A large number of people who are already owner occupiers would also become active buyers and buy at this price - buy a house for their children, grandchildren, parents, holiday homes for out of towners, etc as they are cheap. People who could afford it from all over New Zealand and abroad (such as Australians and Singaporeans who are exempt from the foreign buying rules, and New Zealanders living overseas), are likely to become active buyers in the market. The underlying demand calculation does not incorporate this.

2) if the current median house price in Auckland was $10,000,000. In this case, there would likely be fewer active property buyers in the market. The number of effective demand would be fewer than that for underlying demand. The underlying demand as calculated above would remain unchanged - after all there is no change to population estimates or the assumption of the number of people living in each house. There would still be a "housing shortage" as calculated by economists using the population numbers, but in reality there would be few buyers active in the market if the median house price in Auckland was $10,000,000. Very few would have the deposit necessary to buy, and very few would meet the bank lending criteria particularly on debt servicing.

This is the reason why the underlying housing shortage is a misleading number (as calculated by economists, etc, and quoted by mainstream media, politicians, property market commentators, etc) as a justification for future house prices to continue rising. It is used as a convenient justification by those in the real estate industry to persuade those to enter the residential real estate market.

Economists in their calculations of the underlying housing shortage, and talking about future property market prices, have failed to incorporate the fact that:
1) as prices rise, effective demand falls
2) as prices fall, effective demand rises.

This is introductory economics and the basics of demand in a free market. Underlying demand is unchanged, yet effective demand changes. This is how there can be a housing shortage (due to underlying demand), yet property prices fall (due to an imbalance between effective supply and effective demand).

So when talking about a housing shortage, there are two numbers to understand, each useful for their own specific purposes:

1) Level one supply and demand - this is underlying supply and demand - this is the most commonly referred to and discussed by most property market commentators, media, politicians, etc. This is useful for long term town planning purposes for local councils to determine infrastructure needs.
2) Level two supply and demand - this is effective supply and demand - and this is the key determinant of property market prices - and this is how property markets can go from being a buyers market to a sellers market (and vice versa).

A 2009 / 2010 report by the Dept of Building and Housing recognises two types of demand
1) underlying housing demand
2) effective housing demand

1) Underlying housing demand

‘Underlying demand’ refers to the number of houses needed to accommodate households in the population. Population increase in the age range of 20–40 (which is when people tend to form independent households) leads to smaller household sizes and more single-person households. Further, positive net migration increases underlying demand for housing. A ‘household’ means either one person who usually lives alone, or two or more people who usually live together and share facilities in a private dwelling.

Natural population growth rates, internal migration, housing preferences and household formation rates all tend to change relatively slowly, and therefore changes in underlying demand caused by these factors are reasonably predictable. By contrast, the level of external migration depends on policy rules and incentives, as well as on wider domestic and international economic conditions, and it therefore tends to have a more volatile, less predictable impact on underlying housing demand

2) Effective housing demand

Effective housing demand is the combined effect of both 1) the desire to rent or buy a house, and 2) the financial ability to rent or buy a house. This aspect of demand is what shows up in the housing market statistics for sales, prices and construction. It also largely accounts for the changes in housing and tenure choices over time.

The New Zealand housing market has not only experienced increased underlying demand from population growth and higher net immigration; it has also (until the recent global financial crisis) experienced an increase in effective demand as a result of higher incomes, lower unemployment, cheaper and easier access to credit, and the preference of New Zealanders, for various reasons, to invest in housing over other forms of investment.

The difference between underlying and effective demand is a function of:
• buyer wealth and income
• the cost and availability of finance
• the state of the economy
• individual consumer preferences (for example, location, or between renting and owning)
• the attractiveness of housing as an investment good.

The other point to note regarding effective demand is that when prices are trending downward, there is the negative price feedback loop. Effective demand can actually fall due to market price signals, resulting in a loss of buyer confidence, job uncertainty and hence there is a possibility that the number of active buyers falls for a period of time.

This economist at the Auckland Council is using their calculation of underlying demand to support the case that property prices will not fall in Auckland due to the housing shortage.

What are some of the differences between underlying demand and effective demand?

The variables below do not affect the calculation for underlying demand, yet they impact effective demand for residential real estate (and hence property market prices).

Financing environment changes:
1) cost of financing
2) availability of financing
a) tightening credit requirements / lending criteria
b) recent fall out from the Australian banking investigations for NZ to be tighter credit, fewer interest only loans, and now investor/occupier rate differentials.

Changed environment in other areas:
- healthy home requirements
- introduction of capital gains tax
- ring-fencing property tax losses
- foreign buyer ban - previously non residents were able to buy residential properties in NZ, now this is restricted, so effective demand is impacted, whilst underlying demand is unchanged.

Changed outlook and perceptions by property market participants in other areas
- outlook for unlikely significant capital gains and
- risky operating in flat property market