Property values rallied in October following a September dip as activity increases and prices remain strong, the latest data from the Real Estate Institute of New Zealand (REINZ) shows.

Median prices increased 23.4% to $895,000 compared with $725,000 in October last year. Ten out of 16 regions reached median price records, and one had an equal price record – the most since March. The number of price records is above average for an October month, reflecting a firm market reinforced by continued demand.

The median house price for New Zealand, excluding Auckland, increased 25.5% to a new record of $753,000 from $600,000 in 0ctober 2020 last year and an increase of 4.6% from September’s value of $720,000.

The median house price in Auckland increased 25% to $1,250,000 from $1,000,000 in October last year, another record median price. All Auckland districts show year-on-year median price growth and six reached record highs – Auckland City $1.393 million; Franklin District $1 million ; Manukau City $1.165 million; North Shore City $1.475 million; Papakura District $1.101 million; Waitakere City $1,128 million.

This was despite the number of residential property sales across the country dropping 21.7% year-on-year, from 9,185 in October last year to 7,190 in October this year. However, there was a significant increase in sales month-onmonth – up 30.3% from September when 5,518 were sold.

REINZ chief executive Jen Baird says despite the restraints the market is operating under, this is a stronger than average October month. We’re seeing the continuation of what is a firm market, despite the pandemic.

End Near For Housing Shortfall

Auckland’s housing shortfall crisis will be over in about a year’s time, say ASB economists. At June this year Auckland had an undersupply of 20,000 houses, but this shortage will likely drop to under 10,000 by June next year and to zero at some point late next year and potentially shifting to a surplus over 2023, according to the economists.

This suggests the booming construction sector cannot be sustained beyond 2022 without a strong recovery in net migration and population growth.

Statistics New Zealand’s recently updated regional population estimates reveal large shifts in internal migration with strong population growth in the regions over the past year, while Auckland saw a drop in its population.

The country’s closed international border has choked population growth into Auckland and, coupled with high rates of housing construction, has meant the housing shortage in the country’s biggest city has dropped at a faster pace than expected.

However, ASB’s economists believe housing consent figures alone likely overstate the growth in Auckland’s housing supply as there has been increased brownfield development where several townhouses or apartments are replacing existing dwellings that have been demolished or removed. Construction delays due to shortages of materials and labour might also lead to lower completion rates over the coming year.

“Nonetheless, Auckland is likely close to having its shortage met – this could happen in 2022 depending on the region’s population growth and the completion rate of new building consents,” says chief economist Nick Tuffley.

This presents the growing risk that Auckland could become over-supplied with housing in 2023. “Whether this happens or not largely depends on how quickly New Zealand’s international border opens up over 2022 to permanent and long-term arrivals and how strong the recovery in net migration is over 2022. “We are assuming a fairly conservative and gradual pick-up in net migration, so there is scope for population growth to exceed our forecasts - in which case the construction cycle would cool down at a more gradual pace than we currently anticipate,” says Tuffley.

For the rest of the country it is a different story. While Auckland has made great progress in closing the gap, the decline in the shortage throughout the rest of the country was modest over the past year given the strong shift in internal migration from Auckland to the regions.

Meanwhile, the proposed Resource Management Amendment Bill, which will enable more higher density developments, will help land-locked cities such as Wellington reduce its own housing crisis which has become acute in recent years, says Tuffley. The Bill allows for a more rapid supply response and for dense housing construction in areas that are closer to the CBD and transport networks and that have been previously blocked by powerful/active nimbys. It should, says Tuffley, prevent housing shortages developing to the same extent again.

Rentals Revealed

Barfoot & Thompson’s latest report reveals the average weekly rent for a home in Auckland moved less than $1 at $606.25 during the third quarter, ending September. According to data from more than 16,000 rental properties managed by Barfoot & Thompson, the average weekly rent for the previous quarter, ending June, was $605.51. A year-on-year comparison shows the average weekly rent in the region increased 2.97%, or $17.49, more per week.

Barfoot & Thompson director Kiri Barfoot says the market has settled into a rate of annual growth hovering at about 3% over recent years. However, lockdown in Auckland has contributed to slightly more subdued movement this quarter.

“While prices are still moving up gradually, we have seen a consistently slower pace of change bed-in over the past two years.

“By way of contrast, five or six years ago, peak of increases were hitting nearly double the current rate and price difference. For example, in September 2015, rents had risen well over 6% yearon- year and by more than $30 per week.” Trade Me’s rental price index shows Auckland’s median weekly rent cracked $600 for the first time in October, increasing by 5% over the same month last year.

Trade Me’s property sales director Gavin Lloyd says rents in the Auckland region have been edging closer to the $600 mark since the beginning of the year. “The region’s median weekly rent was stagnant at $590 from January right through to June, before it climbed to $595 in July where it sat tight right up until last month.”

The most expensive Auckland district was North Shore City at $650 a week, followed by Rodney $640 and Papakura $625 a week last month. New Zealand’s national median weekly rent also reached a new high of $560 in October, increasing by 8% year-on-year. Around the country there was a 3% increase in demand for rentals last month when compared with October last year. The number of rentals on the market dipped last month when compared with the same month in 2020. “Supply was down 7% nationwide, with the biggest drops in Nelson/Tasman at -41%, Bay of Plenty -27% and Canterbury -25%.

Construction Costs

Housing costs are still running at double the typical pace. Supply chain disruptions and a shortage of materials has resulted in rapid rises in construction costs, although they are slightly down on the June quarter. The Cordell Construction Cost Index (CCCI) reveals costs rose 1.6% in the three months to September, down from the 2.2% rise in the previous quarter but still well above the typical quarterly increase of about 0.8%.

On an annual basis, the country’s construction cost growth rose from 4.5% in the 12 months to the second quarter of this year and 5.5% in the 12 months to the third quarter – the fastest annual rate since the first quarter of 2018 (when growth was already into a slowdown phase).

Cordell data shows timber prices, particularly structural timber and cladding, have been a key contributor to overall cost increases. Metal costs and products have also been a factor.

CoreLogic chief property economist, Kelvin Davidson, says it is likely the construction industry will remain busy for some time.

“Cost pressures as shown by the CCCI may get worse before they get better. Anecdotal evidence suggests the latest lockdowns will simply sustain the disruptions on supply chains and construction material costs.

“Investors are also now strongly incentivised to buy new builds, due to their exemption from the loan-to-value ratio rules and continued ability to claim mortgage interest as a deductible expense for the first 20 years of a property’s life.

“These tailwinds for new-build demand have all come at a time when more skilled labour can’t be imported, so it’s a bit of a perfect storm, and will likely help to sustain some upwards pressure on construction costs.” However, Davidson says there are some headwinds which should eventually come into play and ease construction cost pressures.

“Mortgage interest rate rises will likely impact new home demand along with the general cost growth itself which will feed back into softer activity,” he says.

The jump in construction costs comes at a time when CoreLogic is reporting a 28.8% rise in housing values nationally over the past year. Higher construction costs are likely to add to affordability challenges already at play across the established housing market.

“For anyone who is looking to build or to renovate, or for someone who owns a business involved in the residential construction industry, it means they are all likely to be facing significantly higher costs,” says Davidson.

Consents Dip Slightly

The number of building consents issued in September fell 1.9%, a relatively small decline on last month’s surge in consents for medium density houses, apartments and townhouses.

The small drop in September follows the strong number of consents issued in recent months. As a result, the total number of consents issued over the past year continues to break records, with 47,331 new dwellings consented – a rise of 26% compared with the previous year.

The rise in building consents has been widespread, with particular strength in Auckland, accounting for about half of the increase in overall consent issuance.

Over the past year just under 20,000 new homes were consented in Auckland, with medium-density dwellings accounting for a growing percentage of houses in the region.

That follows changes in housing regulations that allowed for greater densification in the country’s most populous region. With new legislation likely to allow for greater densification throughout the country, Westpac Bank senior economist Satish Ranchhod expects other regions will also see a shift to higher density construction over the coming years. “That will also be a key influence on land values,” he says.

There have seen strong building consent increases in Northland, Waikato and Bay of Plenty, and a strong lift in Canterbury.

“While there is a large pipeline of work planned, there are questions around how quickly this work will be completed,” says Ranchhod.

“As we’ve highlighted previously, building firms across the country have been running at pace and are already struggling with difficulties sourcing both materials and staff.

“Those shortages are constraining the amount of work that can be completed and may mean that some projects get delayed.

“The associated cost pressures are also squeezing some firms’ margins and pushing the price of new projects upwards. This still leaves a strong outlook for building activity over the coming year, but it’s clear that capacity constraints will be a major hurdle for many projects,” he says.

The high levels of building that are planned come at the same time that population growth has plummeted.

That means the shortages of housing that developed over the past decade are now being rapidly eroded.