Where to from here?

With New Zealand’s building and construction industries badly impacted by more than 33 days of zero activity over the lockdown period, independent economist Cameron Bagrie investigates whether expected lower building activity will have an impact on residential property prices.

Broadly speaking New Zealand still has a shortage of housing, and there exists an element of pent-up demand, he says, noting the residential property market has bounced back as a degree of normalcy returned.

“Where New Zealand’s move to alert level four effectively shut down all building activity during late March and April, we’ve seen consent numbers rebound in May and June - and a lot of concrete is being poured,” he adds.

Statistics New Zealand reported 3,554 new residential consents issued in May, which was the highest number since the same time last year.

“In the 12-months to March 2020, issued residential consents had risen strongly, this, paired with heightened consent activity from submissions put on hold during the lockdown period has delivered a substantial pipeline of work,” Bagrie says.

However, reports expect residential building activity will decline by up to 20 percent in 2021, hampered by a lack of migration-driven demand, funding constraints, and shifting buyer appetites.

Migration uncertainty

“The biggest challenge to the construction industry is that despite more expatriate Kiwis returning home, the brutal reality that migration will be contained for the next 12-months will remove an awful lot of demand,” Bagrie says.

New Zealand’s housing shortfall has been estimated at around 50,000 homes however, an expected decline in growth of the overall population may have an offsetting effect, allowing demand to catch up with supply for the first time in about seven years.

Where previously our population has been rising by about 90,000 a year, border closures and a worsening global environment are expected to dampen migration numbers by up to 60 percent come 2021.

“Delayed construction, cancellation of projects, and questions about labour and funding will see a drop-off in residential building activity – affecting supply numbers.”

“However, we are yet to see exactly how deeply muted migration will impact the demand for housing,” Bagrie explains.

“Instead of needing 40,000 houses to be built each year, we may need less than 30,000 but the key question is how long will the borders remain shut?”

A temporary closure will contain the impact on building activity, as pent-up demand helps the industry in the near-term, but, he says, continued border closures well into 2021 will have a serious impact on demand and how many houses need to be built.

“What we also know is the effect on certain markets could be stark.”

“Inner-city apartments, for example, have been badly affected by the loss of foreign students and the acid test for the tourism sector is going to come from November this year to March 2021,” Bagrie says.

Funding constraints

Another area of growing concern to residential property developers is whether banks tighten lending criteria in response to liquidity, additional market risk, and economic uncertainty.

“Money might be cheap, but accessing it requires jumping through a few more hoops”, Bagrie says.

“Having a job resides at the heart of servicing a loan; taking on debt, and having the confidence to purchase, which is problematic given job security is not as high as it has been.”

“Banks will be analysing deals very carefully, while this doesn’t necessarily mean they won’t have an appetite for higher-risk lending, it does mean residential developments will have to be appropriately priced, and I think developers will need to have a fair amount of skin in the game.”

“Which given the global financial climate they may be reticent to do,” he says.

Although the Government has substantially boosted spending on infrastructure by fast-tracking some large-scale transport and housing projects, the lift in public sector spend will likely be offset by a reduction in activity from the private sector leading to an easing rate of housing supply and total construction activity over the next few years.

Buyer appetites

Interestingly, Bagrie points to COVID-19 potentially leading some shifts in the behaviour of residential property owners.

“Over the past few years as affordability has bitten, people have traded the need for extra bedrooms, but the move to more agile working environments could reverse that,” he says.

“I think we’ll see greater demand for an extra bedroom/home office – the ‘working from home effect’, especially in Auckland and Wellington where there’s a greater proportion of office workers.”

“The economic impact of rising unemployment is another area we’re watching closely; will this have a long-term effect on peoples’ willingness to build a house and take on more debt?”

Bagrie says that this recession is not a normal correction and that a host of quirky behavioural effects are changing the residential property landscape.

“We can’t travel – so many are thinking ‘let’s renovate’” he says.

“We could see areas such as Northland go pretty well, as people find added incentive to finally buy the batch,” he adds.

New Zealand’s residential housing market is currently upending severe predictions that initially picked values to plummet by as much as 15 percent.

The economy has handled the initial COVID-19 challenges well, but according to Bagrie, there is a long road ahead. Less migration and fewer tourists are big economic holes to fill.

However, he highlights when the market moves south there’s typically a collapse in sales; people are reluctant to move house which constrains supply, however, if this were to occur the crunch on building activity would exacerbate the lack of stock; and those factors would act to stabilise the market.

“While the drop-off in residential building activity is likely to be gradual, becoming more evident as we head toward the new year, the reality of slower population growth is the biggest contributor to lessened building activity,” Bagrie says.

However, at present values have held up across the country, pointing to a sweet spot in the market where the impact of migration and muted construction has not yet delivered the bite we are expecting to feel come September when the general election adds another layer of uncertainty.

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