Housing Supply And Demand: From Famine To Feast

Today we released our latest analysis on NZ’s current housing shortage and the housing market in general. The full note can be found here: https://inner.kiwi/commentary/housing-supply-and-demand-famine-feast/

• New housing supply far exceeded an anaemic rise in new housing demand over the last year. New Zealand’s housing shortage shrank to an estimated 23,000 homes in the year to June, from a downwardly revised 57,000 homes last year.
• NZ is now predicted to start accumulating a surplus of housing over the coming years as projected building activity outstrips rising demand.
• However, there is a cloud hanging over future building activity. The current housing market is not conducive to property development.
• In addition, some indicators, such as net new residential electricity connections, point to the potential for downward revisions to already published supply data.
• All else equal, the rapid turnaround in NZ’s housing shortage means that house price growth will be held back over the medium term. We are forecasting house prices to be 13% lower by year end, followed by a modest recovery.

Since our last housing market note a year ago the building industry has been busy. Really busy! Despite all the disruption from covid, despite the lack of materials, and despite the difficulty finding staff, StatsNZ estimates a total of over 41,000 homes were built in the year to June 2022. That is by far the largest addition to Aotearoa’s housing stock in the data going back to 1991. At the same time, new housing demand has slowed to a trickle as population growth has hit the lowest rate since the 1980s. The seismic shifts we’ve seen in housing supply and demand drove down New Zealand’s housing shortage to an estimated 23,000 homes, still large but massively down from a revised 57,000 shortage estimated last year.

The current yawning gap between supply and demand points to New Zealand’s cumulative housing shortage disappearing over the next 12 months. However, forward indicators suggest that the covid-era trends in housing supply and demand are about to change. The outlook for house building has dimmed. And with our border fully reopened, positive net-migration next year should see demand lift off lows. Importantly, there is significant uncertainty around our demand and supply analysis at present. Some indicators, such as net new residential electricity connections, point to the potential for downward revisions to already published supply data.

A growing surplus of houses ahead is likely to weigh on New Zealand’s housing market and generate a slow recovery in house prices. After the post-covid boom of 2021, the housing market is clearly in retreat. Credit conditions have tightened dramatically, in large part due to the RBNZ embarking on aggressive interest rate hiking to tame multi-decade high inflation. And the RBNZ isn’t done yet. We see the cash rate reaching 4% by year end. Across the motu, sales activity this year is down by around a third compared to a year ago. House prices have recorded falls in every month in 2022 so far. We have downgraded our house price forecast and now see house prices fall by 13% by the end of the year. Our forecast would take house prices back to where they were at the start of 2021. Our projected recovery in house prices is weaker too.

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