Home Loans
22/5/2023

Is The Construction Boom Coming To An End?

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The New Zealand residential property market has witnessed two significant trends in recent years. The first is the fluctuation in house prices, garnering substantial attention and regular commentary. The second trend, which evolves more gradually but holds relevance for the future trajectory of prices, is the construction of new houses.

There have been notable fluctuations in house proices over the years. During the global financial crisis, prices fell by 11%. Following that, prices doubled in most areas, and between 2017 and 2019, Auckland prices remained relatively stable while other regions experienced slower price growth. At the end of 2019, house price inflation accelerated due to record-low interest rates set by the Reserve Bank to combat deflation concerns. In 2020, the onset of the pandemic led to a brief 3% decline in average prices, followed by a surge to exceptionally high levels by the end of 2021.

Since then, house prices have been decreasing and are currently down approximately 16% from their peak levels. Much of the housing market commentary focuses on these price changes and their future trajectory.

However, beneath the price fluctuations, there has been a significant rise in house construction, displaying a more consistent pattern compared to price movements. The number of consents issued for new dwelling construction increased from under 14,000 in 2011 to nearly 51,000 about a year ago. However, consent numbers have started to decline. In the three months leading up to February, consents for new dwellings in New Zealand dropped by 18% compared to the previous year, with a 29% decrease in February 2022 compared to February 2021.

There is a reasonable correlation between changes in dwelling sales and subsequent changes in consent numbers. Nationwide, home sales are expected to reach record-low levels since data collection began in 1992. This indicates a potential decline in consent issuances across the country.

It is possible that the annual number of consents could fall to 30,000 within two years, although this would still be above the 20-year average of 28,000. Considering high levels of consumer pessimism, increasing cost of living, above-average mortgage interest rates, and challenges within the residential construction sector, consent numbers may decrease even further.

While it is expected that house construction activity will decline steadily over the next two years, it is unlikely to reach the depths seen in 2011. Interest rates are projected to decrease in 2024 and 2025, and although the unemployment rate may rise, it is unlikely to surpass the 6.7% recorded in 2012. Population growth is accelerating as more people move into New Zealand, further increasing the demand for housing.

The interplay between rising housing demand from population growth and a slowdown in new housing supply is likely to result in rent increases in the coming year. This could entice investors back into constructing new dwellings to benefit from taxation advantages not available to those purchasing existing properties. Additionally, this dynamic of supply and demand is expected to lead to a resurgence in house prices in 2024. Eventually, this will stem the decline in house construction as buyers, possibly by late 2025, begin to consider building new houses rather than searching through a dwindling number of existing properties for sale.

However, it is important to note that the current climate in the house building sector is dominated by negatives. Buyers should exercise caution when considering building a house. Financial institutions will likely require high certainty regarding the builder's ability to complete the project before providing financing.

This article is for informational purposes only and should not be considered as financial advice. It is always recommended to consult with a qualified financial professional before making any financial decisions based on your individual circumstances.

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