Housing supply

Supply and demand for housing: from famine to celebration

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

  • The supply of new homes has far exceeded the anemic increase in demand for new homes over the past year. New Zealand’s housing shortage has narrowed to around 23,000 homes in the year to June, from a downwardly revised 57,000 homes last year.
  • New Zealand is now expected to start accumulating a housing surplus over the next few years as projected construction activity outpaces growing demand.
  • However, a cloud hangs over future construction activity. The current real estate market is not conducive to real estate development.
  • In addition, some indicators, such as net new residential electricity connections, point to the potential for downward revisions to previously released supply data.
  • All other things being equal, the rapid recovery of the housing shortage in New Zealand means that house price growth will be dampened over the medium term. We expect house prices to decline 13% by year end, followed by a modest recovery.

Since our last note on the housing market a year ago, the construction industry has been busy. Very busy! Despite all the disruption caused by covid, despite the lack of materials and despite the difficulty in finding staff, StatsNZ estimates that a total of over 41,000 homes have been built in the year to June 2022. It is by far the largest addition to Aotearoa’s housing stock in data dating back to 1991. At the same time, demand for new homes has slowed as population growth has reached its lowest rate since the 1980s. The seismic shifts we have seen in housing supply and demand have reduced New Zealand’s housing shortage to around 23,000 homes, still large but down sharply from a revised shortage of 57 000 estimated last year.

The current gaping gap between supply and demand indicates that New Zealand’s cumulative housing shortage will disappear over the next 12 months. However, forward-looking indicators suggest that housing supply and demand trends in the covid era are about to change. The outlook for home construction has darkened. And with our border fully reopened, positive net migration next year should see demand take off. It is important to note that there is currently a great deal of uncertainty around our supply and demand analysis. Some indicators, such as net new residential power connections, point to the potential for downward revisions to previously released supply data.

A growing housing overhang ahead is expected to weigh on the New Zealand property 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 considerably, largely because the RBNZ has embarked on aggressive interest rate hikes to rein in decades-high inflation. And the RBNZ is not over yet. We see the cash rate reaching 4% by the end of the year. Across the motu, sales activity this year is down about a third from a year ago. House prices have recorded declines every month in 2022 so far. We have revised our house price forecast down and now see house prices falling 13% by the end of the year. Our forecast would bring house prices back to where they were at the start of 2021. Our projected recovery in house prices is also weaker.

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