Commentary

What our new government’s policies could mean for the NZ housing market

November 20 2017  |  4 min read


During the period from 2005 to 2007 when the economy was strong and the unemployment rate fell below 3.5%, concerns began to grow about homelessness and a growing lack of affordable housing. Newspapers contained articles about families living in sleepouts and caravans in holiday parks. But as soon as the economy went into recession in 2008 and the Global Financial Crisis doubled the length and depth of that recession from late in the year, the focus on housing ended.

More truthfully the focus shifted to worries that house prices would collapse. We spent considerable energy late in 2008 and through into 2012 trying to convince people that prices would not collapse for at least two reasons. First, NZ (more specifically Auckland) went into the GFC with a shortage of housing – not an over-supply as experienced in Ireland, the United States, and Spain for instance. Second, borrowing costs plummeted so few people were under pressure to sell right away.

Prices continue to rise

From 2012 we shifted away from warning that prices would not collapse to explaining why they would continue to rise in Auckland, with the regions eventually following. These reasons included:

  • overseas buying
  • sustained low interest rates
  • new investors becoming landlords in order to find yield not available from conservative assets like term deposits
  • rising construction costs
  • labour shortages
  • strong immigration-driven population growth
  • catch-up buying by those who unwisely held off buying from 2007-12 waiting for a price collapse
  • continuing insufficient construction making Auckland’s shortage worse

The market starts slowing down

From 2016 we shifted to warning that one way or the other price rises would slow despite the worsening shortage as the Reserve Bank applied restraint through loan to value ratio requirements (LVRs). We warned that it was all simply a matter of how tough the LVRs needed to be in order to restrain the home lending risks which the Reserve Bank was aiming at.

As it turned out the 40% minimum deposit for all investors hit the sweet spot and Auckland prices have flattened, sales have fallen, and one by one the regions will also see the same pattern.

Where to now?

Yet concerns about housing affordability and homelessness which sparked into life again about five years ago remain. Will measures planned by the new government erode these concerns? Not really. This is because, (as we have strongly pointed out for many years) the soaring prices reflect a fundamental repricing of New Zealand’s housing stock and not a debt-driven speculative bubble. That is why the new government will face a steep uphill battle in its housing goals. Affordability will not radically improve and homelessness will continue – though it will be diminished. At the heart of the battle will be the challenge to radically boost house construction.

New Zealand already has a shortage of builders, electricians, council inspectors, concrete layers, engineers etc. with house consent numbers running at 31,000 per annum. The shortages will get worse as the government tries to boost numbers above 40,000 per annum. Why? Immigration rules are to be tightened so that up to 30,000 fewer people enter the country. The jobs they no longer do will either cease to exist or be taken by people who might otherwise have contemplated a career in construction. The same goes for the loss of some young people to a year’s free tertiary study. Others will be lost to jobs in forestry; planting 100 million trees per annum, to an expanding civil service, expanding teaching and police numbers and so on.

The shortage of houses in Auckland is likely to worsen. However, there is a good chance the government’s prime numerical housing goal of building 10,000 affordable houses a year will be met. It will be achieved through what we economists call ‘crowding out’. People who would otherwise have built middle to upper priced houses, barns, bridges, and offices will build these cheaper houses instead.

This will eventually create a situation where lower priced houses become better supplied, middle to upper priced houses worse supplied, and therefore the price gap between the lower group and those above it will widen. Buyers of the coming affordable houses may find themselves locked into that end of the market for considerably longer than they will be contemplating when they make their purchase.

At least financing costs look like remaining low in spite of a coming deterioration in the annual fiscal accounts. But that will simply mean demand for housing remains firm. Eventually the housing cycle will kick off again – but that might not occur until five or so years from now.

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