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This weeks Latest Property Market Update
Economics is all about changes in demand and supply for something now and expectations for both in the future. If you think something is going to be in short supply in the future, like housing, your demand will tend to rise right now. That is because you expect less housing to choose from as a buyer down the track and higher prices to buy what you want. If as a supplier of housing you think demand growth is going to exceed supply growth then you will feel encouraged to boost your output. You will see little risk even in building houses before someone has signed up to buy them.
So far so good, but what if these expectations are wrong? For instance, and specifically with reference to a key point we have striven to make here, what if expectations for demand growth are too high? What if people erroneously believe high Auckland prices will cause lots of people to desert the city and the employment options it offers for the relaxed off the ladder lifestyle offered in the regions?
Then an over-supply can develop and builders risk collapse while buyers find themselves in negative equity positions. Where might the risk of such a thing happening be worst? To answer that we need to look at two things, one of which we have twice done. First you look at population growth projections. Second you look at supply growth. In this column I’m going to look at the latter.
I feel spurred to do this because of a recent discovery in the data on dwelling consent issuance around the country. It has taken 27 months for the number of dwelling consents issued in Auckland to reach a level 35% above the 25 year average. But stripping out Auckland and Canterbury it has only taken 16 months for the rest of the country to rise from average issuance to 33% above average.
In the regions there is a dwelling supply response we are not seeing in Auckland in terms of speed. Where is the speed of supply response the fastest? In Northland it has taken only 11 months to go from average to 34% above average. In Waikato 20 months from average to 45% above. In Bay of Plenty 17 months to get 48% above average. In Manawatu/Wanganui seven months to get 29% above average.
Everywhere else either consent numbers remain below average (not joining in the construction boom – Gisborne, Hawkes Bay, West Coast, Southland, Tasman, Nelson, and Marlborough) or you’re in Queenstown.
So now we ask ourselves for the fast supply response regions, does it look like population growth will match the supply surge? Statistics NZ project that the population between 2013 and 2043 will rise by these percentages. Northland 19%, Waikato 32%, Bay of Plenty 26%, Manawatu/Wanganui 7%.
“One of these things is not like the others, one of these things just doesn’t belong”
If you are investing in the regions be aware that in 17 of New Zealand’s local authority areas population is forecast to decline. And be aware that because surging prices are driven by outsiders after which locals join in, when the outsiders have bought enough and start looking back in Auckland for bargains, regional markets will flatten. And it is when that tide ebbs that we will see who is exposed and in what part of the central North Island. Be careful in the assumptions you may be making and be sure to focus on yield while planning for a long-term hold.
Written by Tony Alexander
(BNZ Chief Economist)