Everything that is wrong with the Kiwi property market can be put down to supply - and a lack of it, Kiwibank chief economist Jarrod Kerr says.
"We’re hopeless at building houses. And we refuse to build the infrastructure required to expand," he says.
"We fail to maintain the infrastructure we have. But we insist on adding to the existing (creaking) load."
Kerr's comments come in an Our Take Kiwibank economics publication, which is headed: Kiwi housing: all you need to know for the great BBQ debate this summer.
"If you want to sound like an economist, (but hopefully with a bit more personality), here’s some tips, and crushing one-liners," he says.
In this century alone, we’ve seen three significant spikes in population growth, Kerr says - and proceeds to outline what happened.
"At the turn of the century, we saw migration boom. The spike in migration led to a spike in demand for properties, both rentals and houses. House prices rose in response.
"Did we increase our spending on infrastructure (not to mention health, education and other services) to handle the flow of migrants? No. But we learnt from this mistake," Kerr says.
He then goes on...
"From 2013 to 2019, we experienced the greatest migration boom in recorded history. In 2018, we estimated the shortage in dwellings blew out to a frightening 100,000. The shortage worsened to 130,000 in 2019. Did we increase our spending on infrastructure (not to mention health, education and other services) to handle the flow of migrants?
"No. But we learnt from this mistake."
And then finally...
"In 2020, we went into Covid fearing the worst. We locked down and closed the borders.
"We saw a net outflow of migrants. We allowed housing supply the chance to catch up. Supply outstripped demand, and our housing shortage improved.
"This was our best chance to eliminate the housing shortage. We did good, for a while.
"But then the borders reopened. And over the last year we have seen a net 120,000 migrants enter Aotearoa in search of a home. That’s the largest increase we’ve seen in one year. Will we increase our spending on infrastructure (not to mention health, education and other services) to handle the flow of migrants? Probably not enough.
"But we will learn from this mistake [insert sarcastic voice]," Kerr says.
He says most policymakers focus on demand because it's the side of the equation they can influence.
"More must be done to increase the supply of land (and all the utilities and services required) for development if we are to respond to surges in population."
He says there are plenty of solutions, including self-fund infrastructure funds and scaled-up builders like Kāinga Ora.
"We just need the political will-power to execute. The troubles with KiwiBuild highlight the difficulty in getting things done, and deepens the fear of trying.
"It’s all about improving the elasticity of supply. Now that sounds like an economist. If you want to sound like a normal human being, say 'improving the ability to boost supply'," Kerr says.
He says that at the moment, at a time when we need the supply of homes to surge, to meet migration demand, we’re seeing a fall in consents.
"Over the last year or so, the decline in housing activity and prices have seen builders scale back. It’s expensive to build in NZ, for a variety of unacceptable reasons. And developers are no longer getting the premium price they need. Pre-sales are also soft.
"The good news, we’re getting builders. Our migration stats show us that the largest group of migrants are tradies. So we’re increasing our capacity to build. What we need is a stabilising in house prices – and it’s happening now – to shore up demand and therefore boost supply."
Kerr says in terms of the year ahead for the housing market, the surge in migration will play a big role.
"The demand/supply imbalance will worsen. The surge in migration and the loss of dwellings at high risk of climate change will only exacerbate the housing shortage. The new Government will play a big role. Because the ‘promised’ reintroduction of interest deductibility, shortening the Brightline test timeline, and possible watering down of the CCCFA [Credit Contracts and Consumer Finance Act], will entice investors. Any added infrastructure spend or incentives for new builds will also be welcomed."
Kerr thinks interest rates will fall in 2024.
"But buyer beware: The RBNZ [Reserve Bank] is threatening to hike again. So there may be a lift near-term."
He says the Kiwibank economists' "best guess" is house prices will rise by 5-to-7% next year. "Call it 6% to sound precise."
For anyone who has "suffered" their way through an economics course, "you know we like talking in supply and demand", Kerr says.
"Demand is likely to outstrip supply. That puts upward pressure on price. It’s overly simplistic, (something that is frowned upon in the economics profession), but for every 120,000 people, we need roughly 50,000 new dwellings (with roughly 2.5 people per house). And if we follow the downtrend in people per house to say 2.1, a more ‘desirable’ number, we need more like 60,000.
"Regardless of your assumption, 2.5 or 2.1, we need more than we will build.
"We built 46,000 last year, a record effort, but that pace is slowing fast. We expect supply to fall back into the low-to-mid 30,000s. The residential construction boom is cooling quickly. Supply is unlikely to keep up with demand for the foreseeable future. Unless we see some significant policy changes. So that’s a big factor behind our forecast."
Kerr says that interest rates may be another supporting factor for the housing market, eventually.
"We believe the RBNZ will keep the cash rate [OCR] unchanged at 5.5%, well into next year. We’ve pencilled in rate cuts starting in November. We had thought this might come earlier, but the RBNZ is threatening to hike again. The RBNZ has also lifted their forecasts for house prices. And they don’t like the inflation implications that brings (it’s all about migration)."
50 Comments
Yes to the first, no to the second.
He is an economist, and therefore energy-blind, and I suspect, Limits to Growth blind.
So, apparently, Is David Hargreaves?
The problem with housing and infrastructure, is a set of compound graphs, compounding. Firstly, we always take the best of everything, first. Easiest-to-service sites, best farmland, closest proximity to ports, most concentrated minerals, best quality of oil. Gaboon and Meranti plywoods are getting heavier; balsa too; the best is gone. As are the 500-year-old Kauri trees; we're down to crap pine, one step up from cardboard and needing treated to survive. Clearly, then, there a quality graph going exponentially down, and an availability one ditto. Developments are never-further from hubs/nodes, than the next proposal. Distance vs servicing is not linear; this is way the old LAs discouraged 'ribbon development'.
Then there was the mass panic with leaky homes; all those who value themselves in $$$$ (gotta feel sorry for them) panicked and wanted their asses covered - which came in the form of over-regulation. That suited the panickers; it made joining their elevated echelon harder from those below - often rent-screwed by the smug in-set en passant. You can still build relatively cheaply; I reckon that if owner-builder came back, I could build say 130 sq/m to Homestar 8 standard, for 100-130k (a friend recently did so) ex my labour - about 8 person-weeks. Most people don't think outside the box - most just don't think, period.
The net energy available to do work globally, is falling. The stuff to apply it to, is reducing both in quantity and quality. Every next service will be further. So of course things will get 'more expensive' if you don't change your approach.
Add in the lack of understanding of Thermodynamics - confident championing of a doubling in efficiencies, I heard this morning; Sadi Carnot would be cracking up, convulsed. Can't happen.
Pine isn't inherently terrible to build with, what most of the problem stems from is that the trees have been getting felled at a much younger age.
Owner-builder is a bit of a pipe dream for mass consumption though; lack of skills base, and increased compliance requirements, both from the state, insurers and banks.
But yes, we have totally stuffed home building.
The NPS-UD mandates high density housing around transport hubs & CBDs. (Even the Aussie are mandating the same.)
But we still have get past Councils who are still locked in pre-high densities mindsets. Case in point? On being provided with a sunlight study they complained about the morning and evening shade thrown by an 8 story building. Talk about a WTF moment. As politely as we could we explained that tall buildings throw shade when the sun is low in the sky, e.g. mornings and evenings, and there's nothing that can be done about it. They still asked us to try. (I'm petitioning the Fly Spaghetti Monster tomorrow. If that doesn't work, I'll try Zeus. And then Odin.)
Yup. Park and Rides. OMG. And the 'parkers' want the rest of the rate payers to provide even more parking. Park and rides are the ultimate sticking plaster solution.
Had a meeting with district council about some multilevel accommodation blocks couple weeks back, and the box ticking exercise from their senior procurement officer was off the scale, even for stuff that wasn't relevant to the project (that luckily their build consultant explained). It must just be bred into them that the forms must be completed and don't try to understand what is on the form.
It is ridiculous. We dont need the MDRS - with three 3 storey houses the size of postage stamps on each section. Pretty much everyone would have been happy with a rule that you can subdivide your property and add one 2 storey house. Who would have complained about that? That would double the housing density immediately. Everyone could still live the Kiwi dream of having their own freestanding house, garden and garage. And developers could still have the ability to cram half a dozen townhouses on a small section or build an apartment block just like they currently do.
Underlying many assumptions seems to be this idea that immigration will keep going indefinitely but I would argue that may not prove founded. The larges source of immigration was The Philippines, India, South Africa and China.
Fertility rates in The Philippines and India have just fallen below the population replacement rate which will ease pressure on government, they are entering an era of "demographic dividend" where there will be fewer workers. With South Africa of course it's predominantly whites fleeing a collapsing society though the white population of SA has already substantially dwindled. China famously has a declining population and very low fertility rate.
In addition there will be more demand for immigrants as populations age (look at recent comments from the EU and South Korea for example) and may of the places with high population growth now don't have an education system capable of producing the skilled workers who might fill roles in OECD economies.
Couple of points:
- Places like South Korea, Japan, and Germany will struggle to attract migrants as well as somewhere thats multicultural, and speaks English
- The developing nations reaching birthrate stalls, are still pretty poor so the desire to migrate will still be quite high
Climate change will make some parts of the globe increasingly uninhabitable leading to more migration in the next century than the world has ever experienced. See Gaia Vince: mass climate migration is inevitable. Places like NZ that will remain habitable and who are culturally able to assimilate migrants will likely increase in population... that is if we can improve infrastructure provision and elasticity of housing supply.
Potentially of what you say rings true (which is certainly possible), we may see an increase in foreign companies relocating somewhere like NZ, instead of their home turf, should it become too perilous. With that increased money, infrastructure is much less of an issue.
Many Germans speak English, but it's not their first language.
Germany struggles to attract skilled migrants, because as I said it's not been as migrant friendly as many other nations.
https://www.euractiv.com/section/politics/news/germany-struggles-to-ada…
Germany has the 7th highest level of immigrants in the OEC, higher than UK. Not sure where you're getting your data from. It has the highest number of non-EU immigrants of European countries and has generally had a welcoming attitude towards immigration since the 50s due to low birth rates and labour shortages.
Germany has had a large influx of asylum seekers and refugees, but a lower level of skilled migrants. By level, you mean % rate, or raw numbers?
You can see from this graph that Germany's migrants have a much lesser rate of employment than 2/3 of the rest of the OECD.
https://www.oecd.org/migration/
They are not attracting more willing migrants than somewhere like us, or Australia, despite being a fairly affluent country, with some of the world's lowest birth rates. Ditto the likes of Japan, and Sth Korea (these latter two being admittedly being even more dire). Maybe the same reason their birth rates have plummeted relatively stronger is also the thing keeping migrants away, who knows.
A whole opinion on the housing sham and zero comment from the esteemed bank lackey as to why credit creation is allocated to non-productive purposes such as bidding up existing house price stock instead of producing things like houses.
No wonder we're a failed developed nation.
As much as I like Jarrod's economic view of the world I won't be giving this view any credence as it fails to mention the supply side effects of the NPS-UD. MDRS, Council's re-zoning to enable higher densities, etc. A massive increase in supply has been enabled. We just need interest rates for working capital to fall a bit to re-start the building frenzy.
Going forward, I expect supply to loosen, not only as fewer immigrants will be allowed to enter the country, but for a number of other factors too.
Boomers moving into retirement villages, a larger number of professionals migrating to Australia and other countries, and a continuation of high weekly excess death levels aided by inadequate hospital services. Add to all that the Council plans to double thepopulations of the central-city areas of the main centres by relocating rural and suburban dwellers into high-rise 20-minute city zones by means of carbon taxes and rates, and it would seem this is how the property ponzi of 40 years is destined to end.
For those who don't to believe, just attend your monthly Local Board meetings and listen well.
"Add to all that the Council plans to double the populations of the central-city areas of the main centres by relocating rural and suburban dwellers into high-rise 20-minute city zones by means of carbon taxes and rates"
Wow, someone drank the conspiracy theory cool aid.
Not everything is a conspiracy, and it is wise to hear all views before reaching a conclusion. Consider there is ample opportunity for change right now, key infrastructure can be decided on base don longer term planning, some major projects needed to aid the current way of life will be declined such as motorways etc for car use, and infrastructure priorities will change.
We are already expecting to see greater urban populations from rural areas by means of an ageing generation moving closer to healthcare and family support. Consider this: It isn't financially viable for the likes of DHB's to have to supply in home care en masse via NASC to the ageing population who choose to live very ruraly and hard decisions will have to be made. This isn't so much a conspiracy as it is longer term planning to encourage certain behaviours for a generational shift and a future with less resources to sustain the way of life of old in NZ.
The included graph on supply and demand sort of shows the issue, in that the supply line should lie almost on top of the demand line, whatever the cycle. 1993 was about the last time we had housing at the 3x median income multiple.
It would be interesting to see what that looked like before 1993, as you can see at that time the demand and supply lines were much closer together.
But as you can see it has become countercyclical. This causes the boom and bust we would normally see, except that the bust is always artificially held up by Govt. intervention, which gives a false bottom, ie an underwrite, which then allows the next more upwards cycle to happen again.
The coalition plan for fixing the housing market is better than previous attempts under other Govts., but if they implement demand measures before they have sorted supply constraints, then prices will rise, and once the extra debt that this would cause is locked into the purchase prices and mortgages, then the damage, again, will to done and impossible to reverse without a crash.
Dale, your solution seems to be releasing more land on the fringes and allowing sprawl. This might address some of the nominal prices of land but it does not take into account the externalities, infrastructure investment, loss of productive land, longer travel times, poor mental physical health outcomes associated with suburban sprawl and most importantly it does not take into account the ongoing maintenance costs in an environment where materials and energy are going to be increasing exponentially. It's a 60s car based utopian discredited dream.
You should at least read Alain Bertuad's Order without Design to get an idea of how it works.
Much of what you have mentioned is not correct. For starters, most cities exclude the externalities to improve their figures. In effect ringfencing any benefits, and excluding the costs associated with producing those benefits. To see how that would work out, just ringfence Auckland for a couple of weeks, and see how it survives cut off from the rest of the country. Whereas most of the country is far less reliant of Auckland.
It's cheaper to build a single-level free-standing house on a $m2 basis than any other type of dwelling. Also with new STEP-type wastewater infrastructure makes it cheaper and more environmentally friendly than present systems.
The reason productive land is used is because that it what the compact city rules say has to happen, ie have to connect to the nearest council infrastructure which could be next to productive land, and won't allow new subdivisions to jump past that onto land less productive.
80% plus of Aucklands jobs are outside the CBD and it is only idealogy that is forcing people to the central city for work but due to high house prices forces them to the fringe to find more affordable housing, creating unnecessary commute times.
Cities are less resilient than the fringe and rural communities. And inner-city residents have worse mental health issues than those on the fringe. There are plenty of studies that show that but you can see it just by walking down Queen Street.
And the point you have completely missed as shown in your last sentence about increasing costs is the present ideology has caused housing to be at least 1/3 more expensive than it needs to be which would have given you more than enough extra money to pay for the ongoing maintenance costs you mention.
If you want more affordable housing you need land use policies that allow up and out, especially out as the fringe sets all pricing for all land going in. So if you want to make it more attractive for people to buy into the centre, then make it more affordable, or for at least for the same money they would be buying a shoe box today, they could buy more of what they really need.
"80% plus of Aucklands jobs are outside the CBD and it is only idealogy that is forcing people to the central city for work"
Sorry is that all those communist banks and other major employment institutions that have bandied to gather into the city centre because of their communist ideology to force themselves to locate in the city centre? You should read up on agglomeration benefits.
Then again as PDK points out all this is a moot point anyway.
You know that PDK doesn't live in the city?
The Christchurch earthquakes exposed the myth of needing a city center. Within a week all businesses had relocated and got on with things. And they are having to offer incentives to get people back, which is being paid for by the ratepayers in the suburbs.
After such an analysis, the results showed that the risk of depression were 20-30 percent higher in areas with detached houses and terraced housing than in sparsely populated areas, and 10-15 percent higher in suburban areas than in inner-city areas.
Interdesting.
"And the point you have compeletely missed as shown in your last sentence about increasing costs, is the present ideology has caused housing to be at least 1/3 more expensive than it needs to be which would have given you more than enough extra money to pay for the ongoing maintenace costs you mention"
The present ideology has not made things more expensive, it has actually hidden the real costs because the "money" is not underpined by real energy costs. Have a listen to the Great Simplification, it's pretty helpful. Your poster boy Houston/Texas is not sustainable.
I advocate looking at reducing demand. Eg: a stable population.
Good for house prices and infrastructure, as in the article. And we would be richer, and best of all a great place to live.
Just been in the bleak highrise outskirts of Lisbon. OMG. Go look. The best argument for a stable population target you could provide.
I feel the same way visiting any city in NZ. Lisbon doesn't have much bigger a population than Auckland, it's just older so isn't spread out like our suburban dystopia. Your arguments more about migration to cities than population.
If you like space, and don't want to live on top of others, just move to the country.
Add to the mix a declining economy and now we not only have housing and infrastructure issues but also an over supply of low to medium skilled labour. There are many more applicants for each job vacancy and a rapidly falling number of vacancies.
Typical too much, too late response from the government, particularly the previous one.
You can still go and buy and older home with better bones from Kauri, Totara, Matai, the works, but the cost of maintenance can be prohibitive. It saddens me when older homes are bowled and the framing burned or discarded. That wood lived eons longer than we did, and deserves a level of respect for the age and tales it holds.
I built a villa few years ago and I'm about to build another one. Great to live in, off the ground and weatherproof.
Old houses can be catastrophically expensive, there wasn't the scrutiny in place to ensure the house was built properly. I've owned 2 houses that leaked in the basement, it's a common problem because when they were built many years ago, drains weren't dug below the level of the foundations. Old villas can be expensive, because the piles weren't treated.
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