New Zealand gained 27,875 new homes last year – the biggest increase in housing stock since 2017, when house prices stagnated, according to figures from property data firm Valocity.
While supply increased, demand stagnated. According to data from Stats NZ, 7,500 more people left than arrived in the year ending January, driven by the departure of around 10,100 non-nationals.
This net migration loss reversed a long-term trend that had continued until the year ending January 2021, when the country gained 25,000 people.
But despite a fundamental shift in the supply-demand equation, home prices rose about 30% last year.
* Home sales fall to new lows after shift in market sentiment
* New housing listings hit their highest level in seven years
* “Five to seven years” to solve the housing supply problem
When University of Auckland economics professor Robert MacCulloch reads the numbers, it reminds him of a lecture given by Harvard economist Edward Glaeser in 2013.
MacCulloch says Glaeser, who is considered the father of urban economics and an authority on housing bubbles, explained how housing shortages could trigger price spikes, and that even when supply catches up, the dynamic prices could continue.
“Even when you release supply, you still get that momentum, the bubble can keep spinning for a year or two,” MacCulloch says.
MacCulloch says it’s likely last year’s price increases had bubble momentum, and with house prices already down 4% this year, a correction could be underway.
He also expects recent amendments to the Resource Management Act, which will allow construction of up to three stories on most city sites without the need for a resource consent from August. , will have a significant longer-term effect on housing supply.
There is even the prospect of overbuilding.
“They didn’t plan that here, but the thought crossed my mind,” MacCulloch says.
The Valocity data was collected by analyzing district assessment rolls, which Valocity assessments manager James Wilson considers a good indicator of completed homes.
Wilson says the 2021 price increases, which came at a time when more people were leaving than arriving and housing supply was increasing, reflected falling market fundamentals.
He says historically low interest rates have made borrowing so cheap that people have focused more on buying properties than the prices they are paying for them.
The relaxation of loan-to-value ratio (LVR) requirements at the start of the pandemic also played a role in the unintuitive price rises.
“It’s the ‘fuel in the fire’ effect, so making money so much cheaper than a response to Covid creates excess demand for properties, outweighing the amount of new inventory created,” Wilson says.
“When the cost of borrowing exceeds a certain point, people pay less attention to the price they pay and more to buying a home.”
“It seems a bit ridiculous to say this, but we’ve seen the market act this way.”
Wilson says there’s a connection between new offerings coming to market and pricing, but the two aren’t necessarily perfectly correlated.
Maybe not a bubble – but definitely a tire with a slow leak
It is difficult to calculate the housing shortage, but Infometrics tackled it in late 2019 and estimated that there was a shortage of 30,000 to 40,000 homes in the country.
Infometrics Senior Economist Brad Olsen says the shift in migration losses last year has been significant, and even with natural population growth from births, year to September 2021, the population increased by only 0.4%.
This is the weakest annual growth since 1989 and confirms the idea that demand has stagnated.
However, Olsen says 2021 followed record population growth of 2.4% the previous year, and with new expedited visa programs, many newcomers are adding to buyer demand.
The overall result is that in 2020 and 2021, population growth and market demand will have stabilized at the average.
Olsen says a bubble is only known as a bubble when it bursts, and the market hasn’t burst yet.
“It’s something that’s slowly deflating, having been pumped up over the past decade and an extreme acceleration in growth during the pandemic period,” he says.
“Given all the factors we are currently observing, I don’t think – at this time – that we can call the housing market a bubble, just because I don’t think it will burst just yet.
“It looks more like a tire with a slow leak at the moment – it hasn’t crumbled, but is leaking slowly – but it still looks like a tire.”
Pain ahead for some buyers
Interest rates are now back to pre-Covid levels, and while still relatively low, Wilson says many people who have rushed into the market to buy another property are going to feel pain at as their fixed term interest rates fall.
He doesn’t expect a stock market crash as he says the banks have acted responsibly and the rapid reimposition of LVRs means there is a lot of ‘meat in the pie’ in terms of money being invested in the houses.
The requirements for most first-time home buyers to have paid a 20% down payment and most investors 30-40% also means that the specter of homeowners with negative equity is unlikely unless the prices don’t plummet, which Wilson says the signs don’t indicate.
Slow house completions
The rise in the number of new homes being built appears to have stalled this year, with only 6,990 completed so far.
Auckland remains about the same as last year, with 2,848 more homes added this year compared to 10,423 last year.
In Canterbury, 1,276 new homes were added this year compared to 4,933 last year, but in Wellington just 378 new homes were added, compared to 2,551 last year.
Wilson says high building prices and delays in receiving materials are to blame for the slowdown.
He expects this downturn to continue for about a year and then it’s gone.
“We’re on the right track now and this data is starting to show that.”
The light at the end of the tunnel
Wilson thinks times are better for first-time home buyers, especially in Auckland.
He says the benefits of Auckland’s unit plan are starting to kick in, and with townhouses and other mid-density construction now the norm for new construction, more well-priced homes are coming to market.
Creating high-growth corridors like Drury will also help bring more inventory to market.
“New Zealand has finally started to understand that it’s about building smarter and not just building more,” says Wilson.
“If we keep building Mcmansions forever, we’ll never solve the housing crisis.”
Developer activity should not stagnate
There are concerns about a slowdown in developments after two townhouse sites recently appeared in mortgage sales and Auckland property developer David Whitburn says there has been a general pullback of Chinese finance from the real estate market.
Wilson says there is no widespread liquidity crisis among banks or lenders, as there was during the global financial crisis, and there are no signs of a general withdrawal of funding.
“Now we hear about unfinished development or developers changing halfway through,” Wilson says.
“These are likely to be ‘late in the cycle’ developers, or new developers with no experience or scale to ride out short to medium term disruptions.”
Wilson says developers whose business model relies on rising prices to make development profitable could be in trouble.