House prices in NZ are, no pun intended, going through the roof.
Some areas have increased by in excess of 20% and even Christchurch has managed to lift itself out of the doldrums of inflation-proof housing over the past five years to deliver a healthy 6 % increase, really since the lockdown ended, so pro rata for a 12 month period would be nearer 9%. The increase is driven by a number of factors but not least it is the low interest rates imposed in an attempt to mitigate the economic effects of the Covid lockdown.
This has resulted in a lot of criticism of landlords and property investors, some banks re-imposing stricter LVRs of 60% and in response, the same old mantra that we must build more.
That seems to be the stock answer to the problem, ‘build more’…but is it?
Surely if it was that simple, we could do it and this was beginning to nag at me so I had a look.
Firstly, let’s look at the basics;
Stats NZ has the year end Nov 19 volume of consents for residential construction issued as 37,000. I’m taking the current average house value (yes I know it’s bit rough) as $629,000.
The theory seems to be build more and the price will come down, so what would make a difference in affordability? Well, every bit helps but this is a speculative exercise so I’ve gone for a target reduction of 15% of average price (a big drop and the economic fall out of that hasn’t been considered other than to note it’s not pretty) and looking at basic economics and the Elasticity of Supply, we get the following:
The % change in quantity of a good supplied, divided by the % change in price, gives the Price Elasticity of Supply (PES).
If we know this ratio, then the formula can be reworked to determine the change in quantity that produces that theoretical price reduction. There is little published data on housing’s PES, and it’s fair to say, depending on where you look and when, it varies between about 0.5 and 0.8.
Taking NZ’s as 0.7, to achieve a price reduction of 15% (this is an inelastic supply condition so price is not overly sensitive to supply) a 10.5% increase in supply should, on the numbers, reduce the price by 15%. This is simplistic averaging, If we use the mid-point method, then the actual increase is 11%.
Using the aforementioned data, NZ would have to grow its supply by 3,300 units per annum which is probably do-able. It’s not easy because there are a number of hurdles to doing this; limited supply chain, limited distribution, (one major motorway north to south interrupted by a four-hour ferry trip), skill shortages, land availability, to name but a few.
But would that really do it? It’s hard to imagine that a relatively small percentage increase in supply will result in that level of price reduction…but that’s the maths. So, it could be that the starting point is wrong, i.e. that the assumed PES is wrong; if it was say, 1.5, making it elastic and therefore a lot more price sensitive, the number required to achieve that theoretical price reduction would be about doubled; Ok, well, a 22% increase in output is a big ask and would make a big difference but increasing output by that amount is not achievable, not in NZ, not in any market and I have my doubts, in a country where demand so patently exceeds supply (the UK is similar) that any such increase wouldn’t just be absorbed by the market.
So what does that tell us? Well, it just goes to show that you can make statistics say a lot things that aren’t real but in this case, a sensible view would be regardless of the price elasticity, house price inflation is not a supply issue, at least not predominantly, it’s a demand one, so can the bloggers and commentators and ‘experts’ please stop this endless yapping about building more housing.
Yes it helps but it’s not the whole answer.
Demand is driven by numerous factors; population growth, interest rates, levels of employment, income levels; in our case particularly, a Covid-free environment attracting returning citizens who need somewhere to live. It (house price inflation) is also a problem that begets itself. The more it inflates, the more attractive it is to those with the wherewithal to participate.
There is little the government can do about these variables; can’t stop returning citizens, can’t have high interest rates as they are a life raft to an otherwise floundering economy, can’t curb population growth and high levels of unemployment are detrimental to society and government equally; get employment up to double figures and you won’t have red wave at the next election Ms. Adhern.
So, what can the government do?
Well, fundamentally, it’s got to be easier to build; got to get product to market quicker. It can ramp up state housing; given it owns a huge amount of valuable land that could be developed. Make development finance easier, (try and get bank funding for a development in NZ, compared to private equity) a development bank with govt taking a fee/interest/profit share, would move development at grass roots level, lots of small development, some of which will become larger thriving businesses.
There is business loan scheme available here but it excludes development for housing which arguably, we need the most!
Streamline (for God’s sake!) the consenting process, or even pre-consent land to a limited degree, just the basics, site coverage, height and parking would do.
We have to embrace fully modular construction, not piecemeal prefab; a lot people don’t want the hassle of having to do the foundations, services, survey work, geotech, etc. themselves, they want a finished product and keys in hand in return for a cheque (or bank transfer). That would probably means overseas skills and investment which at the moment is problematic but should be embraced when the world returns to normal.
Density has to increase, we can’t just keep going out; we have to go up and build more in less space….but not everywhere.
Dropping GST to 12% would aid cash flow even if it was clawed back at the end out of profit and if the build volume can increase with simpler funding and consenting, taking a lesser profit (you gotta be showing 20% on any appraisal to get it funded) of perhaps 14%, would be bearable if you could get to market quicker. For a small-ish development of eight houses, taking 3 months off of the total timescale, annualised, would get you back to close to 20%.
The other, slightly ironic fact is that here, notwithstanding the growing waiting list for social housing, very few social housing providers are actually putting stock in the ground. Most of them just guide people in need into private rented accommodation and whilst they may well provide an umbrella of ancillary social services, they are relying on the private rental market and that has just been made more difficult by the re- imposition of the stricter LVR rules. Their excuse (I know because I’ve spoken to a number of them) is they don’t have the cash to develop but if the state can’t reduce the number on the waiting list then it should at least facilitate others than can help. It’s money spent differently that will achieve the same end.
This though, has now been made hugely more difficult by a raft of well-intentioned but flawed, changes to tenancy law that is driving landlords out of the market.
Of course none of this will filter its way through the decision makers that could make a difference and this debate will continue until some critical breaking point is reached.
Sadly, whatever that is will affect those who need the help the most.