BNZ Layman's Guide - House Building Gets Stronger

For those without economics degrees this is a simple guide to something significant which happened in the world of economics today that has relevance to the person on the street.

House Building Gets Stronger

WHAT HAPPENED?

Statistics NZ released monthly data on consents issued by local authorities for construction of dwellings and non-residential buildings. The data are important because a key factor insulating the NZ economy from weak growth overseas is booming house and apartment construction.

In January while seasonally adjusted dwelling consent numbers fell 11% this followed a massive 19% jump in December and reflected apartment numbers easing. For houses numbers actually rose 3.8% after gaining 21% in December and 8.2% in November – indicating strength beyond apartments. For the year to January total consent numbers were up 34% at 27,717 and 26% above the average annual result the past ten years. January’s total of 1,995 was the highest for January since 1974.

The value of non-residential building consents was down 3% from a year ago – the fourth annual decline in a row, due to farm buildings off 36% from a year ago in the three months to January, factories 20%, hospitals –63%, and hotels etc. –49%.

WHY DID THIS HAPPEN?

Dwelling construction is booming due to the following factors.

- Strong 1.6% population growth over 2002 driven by a net 38,200 migrants.

- Below average interest rates.

- A 15 year low unemployment rate and strong job security.

- Investors switching away from equities and low return fixed interest securities.

- A catch up in construction after below average work in 2000 and 2001.

Non-residential activity is weak due to business pessimism/caution about the future, and falling farm incomes.

WHO IS AFFECTED AND HOW?

Builders who will remain run off their feet for many months.

Anyone looking to get house alterations done as they will struggle to get tradespeople.

People getting houses built as strong demand will push costs up.

Borrowers as the strong result will make the Reserve Bank wary of reacting to the rising NZ dollar by cutting interest rates and potentially creating a housing bubble.

Investors as they will feel recent purchase decisions were justified and will likely gear up for more.

Leaky home scaremongers because the data show people are not being put off building houses for fear of leaks.

WILL THIS CONTINUE?

For a few more months yes for home building due to all the five dot points mentioned above. There may even be a boost from a 0.5% cut in interest rates if the exchange rate keeps rising. But from maybe the middle of this year the risk is that supply starts to catch up with demand and things ease off. The main risk to the home building industry is if either interest rates soar in the next 18 months, which is unlikely, or migration collapses. Given concerns about living overseas that also seems unlikely.

For non-residential activity weakness is likely most of this year due to war and world growth uncertainty constraining business willingness to invest generally.

ENDS

This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. BNZ strongly recommends that readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Neither the Bank of New Zealand nor any person involved in this publication accepts any liability for any loss or damage whatsoever that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.

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