Westpac economists say Auckland needs to ramp up house building but many other parts of the country are building enough houses

Westpac economists are adding their weight to the view that Auckland's building far too few houses to keep up with the growth of the city.

But they say that elsewhere in the country many regions are keeping up with demand, while Nelson might actually be building slightly too many houses relative to expected population growth. In other regions, Westpac cautions that builders should not necessarily expect a return to the sort of conditions seen in the early 2000s.

In a paper titled: "Where shall we build", Westpac's chief economist Dominick Stephens has laid out the bank's analysis of the housing situation around the country, based on Westpac's "People Per House" measure. The bank developed this measure in 2008 to assess housing supply.

Stephens says the idea behind this measure is simple. In normal times the number of people per house should be slowly reducing as families shrink, the population ages and society gets wealthier. But if the population per house is rising, this indicates that construction activity is slower than population growth, and suggests that future building activity will increase - or population growth will slow.

According to Westpac research, the number of people per house currently ranges from 2.3 in Otago, up to 3 in Auckland.

"It is difficult to draw strong conclusions from regional differences in the level of people per house," Stephens says.

"These might reflect the regional population's age structure, ethnic composition, level of wealth, or simply the prevalence of holiday homes. We prefer to look at the rate of change in PPH."

Significantly higher

In Auckland the number of people per house has been rising in recent years and is now "significantly higher" than it was in 1996, Stephens says.

"This suggests that repeated episodes of underbuilding have led to a built-up shortage of houses in Auckland. If construction activity remains at 2012 levels, the number of people per house in Auckland will continue to rise sharply. This is not sustainable.

"Either construction activity will go up, population growth will slow, or people get awfully cosy with one another."

He says the Auckland council issued 4582 consents for new dwellings in 2012. Westpac calculates that to keep pace with population growth and get the number of people per house gently trending downwards, that number would have to rise to 9,500 – a 107% increase.

"Even then, it would take many years to unwind the shortage of houses that has built up," Stephens says.

"Our conclusion from this is that the rate of Auckland house building will indeed go up in the coming years. A sceptic might argue that Auckland is incapable of doubling the rate of dwelling construction due to the ever-present tangle of red tape and expense associated with property development. But we would point out that 12,277 consents for new dwellings were issued in Auckland in 2003, so the industry is clearly capable of such activity levels."

Stephens also points out that the lack of building in recent years has prompted both market and regulatory responses. The market response has been higher house prices, which have incentivised building activity.

"For the Government’s part, it recently announced a range of regulatory changes aimed at boosting construction. If the industry remains stagnant, both the market and regulatory responses will intensify," Stephens says.

The Westpac research has not looked at the Canterbury housing market - as it currently has an obvious supply issue related to the earthquake.

In Wellington, Stephens says there is a less clear-cut case of underbuilding. "Actually, construction activity in 2012 was sufficient to keep pace with population growth – people per house fell that year. But if population growth accelerates in line with forecast, construction activity would have to increase by 32% to keep pace."

Stephens says that all regions except Auckland, Wellington and Canterbury are currently building enough houses to keep up with forecast population growth.

"There is no compelling reason to expect a change in the rate of dwelling construction in any of these regions. This is quite a significant cant conclusion. Building activity in these regions is low compared to the mid-2000s. Yet today’s low level of activity may be sufficient . Builders in these regions should not necessarily await a return to the activity levels of the mid-2000s."

Smaller cities

Westpac's also analysed the situation in some of the smaller cities that sit within larger regions.

Stephens says that though the Waikato and Manawatu regions show no evidence of underbuilding, the smaller city analysis did suggest that Hamilton and Palmerston North were underbuilding relative to forecast population growth. This suggested there could be an increase in building in those cities in the future.

"In Hamilton’s case, a 10% increase in building activity would be sufficient to accommodate forecast population growth. Palmerston North’s numbers are rather more extreme – a 100% increase in building activity, relative to 2012 level, would be required to accommodate forecast population growth. However, we caution against drawing strong conclusions from the small-city analysis, as it is inherently more difficult cult to accurately forecast population growth for smaller centres.

Westpac's analysis of Nelson city indicates it is building "slightly too many houses relative to forecast population growth" – suggesting that there could be a drop in building activity in the future. Stephens again cautions against drawing strong conclusions from the small-city analysis, as it is inherently more difficult cult to accurately forecast population growth for smaller centres.

Dunedin is described as "an interesting case", where the people per house figure has been rising in recent years, now to the same level as seen in the late-1990s, suggesting a shortage of housing has built up.

"However, it appears that Dunedin’s residential construction industry has already ramped up sufficiently to rectify the shortage over time. Dunedin City issued 379 consents for new dwellings in 2012, which is a 60% increase over the number issued in 2011."

Tauranga and Napier/Hastings Tauranga and Napier/Hastings are currently building enough dwellings to match forecast population growth and the people per house figure has been falling steady for some time in both urban areas, Stephens says..