Catalyst for change

Estimated in the realm of some 50,000 dwellings, New Zealand’s historic housing deficit is marked as the key catalyst for rising property prices, with easing land use controls the latest tool deployed to increase our national housing supply.

“For more than a decade high migration contrasted low levels of building activity as the cause of the widening gap between housing supply and demand,” says Suzie Wigglesworth, Bayleys’ national director of projects.

“Today, there is an acknowledgement that we need to provide new homes quickly to stabilise market demand, while policymakers are increasingly implementing initiatives to ensure ongoing investment into off-the-plan projects,” she adds.

Recent moves have seen the Streamlined Planning Process (ISPP) introduced with urgency under the National Policy Statement on Urban Development (NSP-UD), which is set to remove intensification restrictions in five of our largest cities.

These changes open the door for more expedient construction of new homes however, commentators have been left wondering whether a relaxation of regulations could see us facing a housing crisis of different proportions in the future?

A RISE IN DEVELOPMENT

Navigating the waters of a highly publicised housing shortage, New Zealand’s policymakers have moved to free land, remove regulatory red tape and subsidise infrastructure development, paving the way for a rise in residential development.

“When there’s a gap in any market, entrepreneurial individuals aren’t far behind, sensing an opportunity,” says Wigglesworth.

The housing sector is no exception, and it’s been interesting to note a growing number of wealthy professionals, including doctors and accountants, turning their hands to small-scale residential development.

In the past, navigating the convoluted consent process of local councils requires time, patience and expertise, but with land use controls set to relax, Kiwis are increasingly concerned about the quality of the new-build homes that are being produced.

While it may seem as though the rules are relaxing to the point that new developers could flood the market with ease, Wigglesworth says capacity constraints facing the construction industry and growing conservativism among financial institutions are making amateur residential development more difficult.

FUNDING CONSTRAINTS

As New Zealand’s financial system comes out of emergency policy settings previously aimed at stimulating the economy, residential developers are increasingly finding themselves running into difficulty securing the necessary funding for land purchases and construction.

“Attractive development sites continue to move upward in value, with this quickly adding risk to developer margins,” Wigglesworth says.

This, alongside rising construction costs and the affordability constraints facing residential purchasers, are seeing banks apply more stringent funding assessment criteria to residential lending.

Similarly, a firm’s lack of demonstrated experience in the residential development space could easily see amateurs unable to secure the funding required to take projects to the next level.

While New Zealand has just embarked on its fiscal tightening cycle, regulatory changes have seen banks become increasingly reticent to engage in high-risk lending, with a reported 75 percent of Auckland’s residential development funding now said to come from second-tier lenders.

“While banks are applying more stringent lending criteria, quality projects with good feasibility plans continue to be an attractive investment option, so it is of increasing importance that buyers have a good understanding of who they are buying from and their developer’s pedigree,” Wigglesworth says.

“Supply pressures, materials shortages, regulatory challenges and a lack of skilled labour are certainly obstacles to overcome, but established developers, such as those that Bayleys aligns with, generally find the waters easier to navigate given their breadth of experience in the industry,” she adds.

CONSTRUCTION

One of the biggest challenges facing residential developers is the rising cost of construction, with an absence of skilled labour, material shortages and logistics constraints raising costs and pushing out production timelines.

In the year to June 2021, New Zealand’s construction costs rose at their fastest annual pace since the beginning of 2018, contrast this with a shortfall of some 40,000 skilled tradespeople, a call to scale up residential building activity and we have a complicated landscape for new players.

Government analytics show New Zealand recorded an increase in the number of building business closures in the third quarter of 2021, causing lenders and commentators to note the increasing cashflow difficulties facing firms as one of the biggest hurdles facing the sector in 2022.

“With an estimated 265,000 new homes forecasted to be built in the next six years, and growing incentives for investors and first home buyers to buy new, we want to protect purchasers from cancelled agreements, inflated costs and delayed settlements,” Wigglesworth says.

ADVICE FOR BUYERS

“In light of the shifting landscape for building and construction, greater scrutiny is being applied to residential building contracts and it is vital that purchasers seek the qualified advice of a lawyer before entering into any contractual agreements,” Wigglesworth stresses.

Recent reports have highlighted an increase in the misuse of specific clauses that enable the developer to void a contract, only to resell the property at a higher price in a rapidly moving market.

Sunset clauses specifically are used for off-the-plan purchases to protect buyers, allowing them to bow out of the contract should the project suffer long delays.

“While some exploitation of these clauses has been detected recently, the Auckland District Law Society (ADLS) is working on standardised contractual agreements that will mitigate this risk,” Wigglesworth adds.

The move follows similar circumstances across the ditch in the state of Victoria, where changes to the Land Sale Act were passed in 2019 to prohibit developers from misusing sunset clauses to intentionally delay settlements, void contracts and resell properties at higher prices.

“Established operators are unlikely to risk their reputations by cancelling agreements and reneging on contracts unless there is a legitimate cause, but our advice for buyers is to always to seek qualified advice and do your homework, ensuring all parties involved in the development pass your own stringent stress tests,” Wigglesworth says.

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