Rodney Dickens says there won't be a major catch-up phase for residential building unless something significant is done to improve new housing affordability

By Rodney Dickens*

Conventional wisdom is that there is a huge unsatisfied demand for new housing especially in Auckland implying the potential for a major catch-up phase for residential building.

Such a view is based on only partial analysis of the drivers of residential building.

This Raving first presents the conventional view that leads to the conclusion that over 50,000 additional dwellings are needed to meet the unsatisfied housing demand. The rest of the Raving shows why there won’t be a major catch-up phase for residential building unless something significant is done to improve new housing affordability or taxpayers hugely subsidise the lucky group that gets to own government-sponsored new housing.

This report should be viewed in the context of the recent Raving that provided a benchmark for Auckland new housing affordability.

The conventional view is that there has been massive under building

Since 1992 the population has increased 36% while the number of private dwellings has increased 40% (left chart). At face value growth in the housing stock has exceeded growth in the population implying that rather than under building there has been a small element of overbuilding relative to population growth. This is not the conventional view. The increase in the average number of people per private dwelling from 2.53 in 2013 to 2.6 most recently starts to allude to the conventional view (chart below).

In general over time the number of people per dwelling has fallen. A range of factors are behind this albeit not all work in the same direction: rising incomes meaning more people have holiday homes; demographic changes like the percentage of split marriages; the rise of retirement homes as housing options; and changes in affordability. If the number of people per dwelling had remained at the 2013 level rather than increasing, the number of private dwellings would currently be 51,800 higher today. This is the sort of analysis that seems to be done to conclude that there has been massive under building. An alternative perspective is looking at the growing number of people living in unsatisfactory accommodation because of expensive housing (e.g. living in garages, garden sheds and at times even cars/vans).

The fallacy of massive under building

No person or authority has stopped people from building more. The idea of a massive under building is misguiding. In light of all the factors that determine the level of building, including new housing costs, what has been built largely reflects demand. This isn’t the same thing as saying there aren’t lots of people living in unsatisfactory housing conditions. But in the world of demand and supply what has been built is what has been demanded at the going price. The obvious implication is that there will only be a major catch-up for building if there is a major reduction in new housing costs or if there is major government intervention which is largely the route we’re heading as a result of the failure of the government’s policies to deliver more affordable new housing as touched on in the recent Raving that provided a benchmark for Auckland new housing costs.

The chart to the left shows the increase in my estimate of the average national house and land package price versus the increase in the average employee’s gross annual income since 1994. It is just the starting point for looking at the issue of housing affordability. Since 1994 my estimate of the average house and land package price has increased 248% while the average employee’s gross annual income has increased 101%. With new housing costs, like existing house prices, increasing much more than incomes, people are making a rational choice in economising on housing (i.e. more people per dwelling on average by a range of means including children staying at home longer, people taking on borders, people living in garages and elderly people and others moving in together).

As has been documented by the likes of the Productivity Commission and others, rising section prices much more than rising building costs are behind the increase in new housing costs as shown in the adjacent chart. Since 1994 the median section price reported by REINZ has increased 389% versus a 192% increase for the average cost per square metre of new dwellings based on the building consent numbers.

In this context, Labour’s plan to dump the Auckland urban limit and fully debt fund new infrastructure for residential developments – assuming that policy has survived the change of leadership – offers a better chance of getting down section costs than was ever likely to be achieved by the Housing Accords and Special Housing Areas favoured by National. Most likely in response to Labour’s KiwiBuild plan (i.e. build 100,000 “affordable” homes over 10 years), National has announced plans to “ramp up” the building of “social, affordable and market” housing by Housing NZ (e.g. 34,000 new dwellings in Auckland over a 10 year period and smaller plans for some other parts of the country).

What is described as “affordable” by both parties; isn’t. Without the policies needed to get down section prices and to some extent building costs the only way there will be a significant increase in building is by taxpayers subsidising the people getting access to government-sponsored new housing or via building ticky-tacky boxes. Without land or other subsidies that make new housing genuinely affordable there won’t be the demand to satisfy the announced building initiatives by National or Labour. As a taxpayer I much prefer policies that genuinely improve new housing affordability over those that involve taxpayer funded subsidies to the lucky few who make lots of money from being offered new housing below actual costs.

Low interest rates are disguising the extent of the housing affordability problem

When current super low interest rates are taken into account the housing affordability problem is nothing like that suggested by the massive increase in house and land package and existing house prices relative to incomes, but there is still major cause for concern. For the average employee buying the average house and land package price with 80% debt, the interest cost to fund that debt as a percentage of gross annual income is around historical average levels (blue line, left chart below). This is because interest rates are well below average. The major fall in interest rates – blue line, right chart below – has largely offset the massive increase in housing costs relative to incomes in terms of interest costs to service debt on new housing. An implication is that interest rates will have stay low or the proverbial will hit fan.

The story is very different when we look at deposit and debt levels as multiples of income. In 1994 the average employee required 1.2x gross annual income to have 20% deposit/equity to buy the average house and land package but this has now increased to 2.1x (black line, left chart below). Similarly, in 1994 80% debt to buy the average house and land package was 4.9x annual gross income versus 8.5x now. These multiples make for ugly reading (i.e. NZ has a major affordability problem).

*Rodney Dickens is the managing director and chief research officer of Strategic Risk Analysis Limited.