Widening supply-demand gulf ruptures housing market

Stephen Toplis

We think that house prices nationally could keep inflating at around 5% to 7% per annum over the next three years.

With prices holding up, population growth remaining elevated and employment prospects for most New Zealanders remaining positive, we expect further growth in construction, averaging around 6.5% per annum over the next three years.

Supply Problem

Much has and will be said about the state of the New Zealand housing market. The crux of the matter is: are there enough houses for New Zealand residents to find a place to live at a price that does not result in the crowding out of expenditure on the other necessities of life?

The debate that rages, however, is more to do with price than volume.

The owners of housing assets are ecstatic (though not openly so) that their asset base keeps growing while those without ownership bemoan their inability to enter the market.

There are multiple reasons why the housing market is behaving in the way it is but the economic fundamentals could not be more simplistic in explaining international, national and regional housing developments.

The wild chase

At its most basic (in a New Zealand context) there are too many people chasing too few homes.

Supply and demand as a driver of pricing behaviour does work!

Until such time as there is less demand (either people accept living in more crowded households or New Zealand’s population declines) or enough houses are built to meet current demographic needs, then there will remain upward pressure on the prices of the housing stock.

At this stage excess demand rules!

We will not debate as to exactly how many houses are needed, and where, but a back-of-the-envelope look at how many houses have been built over the last few years indicates simply not enough.

Basic CMYKWe concede that if you map this evidence against measured house price inflation, you get the counter-intuitive picture that over supply is correlated with rising prices.

We would, however, interpret this as meaning you need rising prices to encourage the increased supply of housing that is necessary.

Migration demands

Migration will always be the swing factor in population growth.

A developed country’s natural rate of population growth varies little from year to year and hence it is the cross-border flow that matters and which has a significant bearing on the demand for (and, in turn, supply of) housing.

Net migration inflows look set to peak at an annual rate of around 60,000 people a year.

With a population of only 4.6 million this degree of inflow represents a 1.3% increase in total population.

The last time net migration peaked at anywhere near these levels (over 42,000 in 2003) housing permits consequently rose to a peak of around 33,000 on an annual basis. We are currently building only 25,000 houses.

This is just barely enough to cover the net migration inflows let alone the additional needs from natural population growth, past under build, the Christchurch earthquake and natural degradation in the housing stock.

This being the case, it is very difficult to see a sufficient supply response any time soon that will contain house price inflation in a meaningful fashion.

Of course there are calls for the Government to take action to moderate the migration flows but when a significant driver of the net flows is people who are already New Zealanders either deciding not to leave or coming home from offshore, policy measures may not be particularly effective.

The differential in regional house price inflation correlates relatively well with the demographic story. It should be no surprise that Auckland house prices are rising faster than anywhere else in the economy because that’s where the population is growing fastest and employment has grown aggressively.

Stephen Toplis is Head of Research at BNZ, the Title Sponsor of the Indian Newslink Indian Business Awards 2015 and Sponsor of the ‘Best Large Business’ and ‘Supreme Business of the Year.’

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