House arrest
As the property market slows right down, Pattrick Smellie examines fears we’ll have a construction bust before a housing bust and looks at what should be done.
As the property market slows right down, Pattrick Smellie examines fears we’ll have a construction bust before a housing bust.
Having failed at so much else in housing policy, we can’t even keep builders afloat during a boom. That’s right: much of Auckland’s fragmented, inefficient and overheated construction sector is struggling to make a buck at a time when building in the under-housed city is running hot. New Zealand has long had a boom and bust building industry, but the busts usually occur at the bottom of the cycle. That last happened in 2007, when a local recession was followed by the global financial crisis.
Achieving a bust at the top of the cycle would be quite a feat, but that’s what independent economist and Generation Rent author Shamubeel Eaqub reckons we’re heading for.
For many builders, the problem is simply this: more than a year ago, they signed fixedprice contracts that are turning out to have been underpriced as rampant demand creates project delays and the costs of staff, building materials and finance rise sharply.
Even the big players can be caught out. Fletcher Building, one of the country’s largest companies, warned last month of an unforeseen $110 million hole in its profit projections because it underbid on two major contracts, one of them probably Sky City’s New Zealand International Convention Centre in Auckland.
“Contractors are so busy that if something happens and you’re two weeks late, then you are six months late and you go to the back of the queue,” says Helen O’Sullivan, chief executive of Ockham Residential, one of the few large-scale developers in the market. “That puts a strain on financing.”
Developers relying on presales to finance their project can quickly find they’ve sold for less than the cost of construction. That didn’t matter so much when the value of Auckland housing was going through the roof. The expected capital gain made up for the under-recovery on construction costs.
For now, however, that music has stopped. Although the city still tops the national league table by a country mile, with a 91% increase in the average house price since the market last peaked in 2007, values fell 0.4% in the first three months of this year and are expected to remain stalled.
SCREWS GO ON THE MONEY SUPPLY
New Zealand’s trading banks are getting so nervous about both the escalating cost of building and the unaffordability of existing homes, particularly in Auckland, that they’re tightening up on lending well beyond the stricter loan-to-valuation-ratio (LVR) restrictions imposed by the Reserve Bank last September.
In the past, second-tier finance company lenders might have stepped into the gap, but that sector was all but wiped out post-2008.
Values fell 0.4% in the first three months of this year and are expected to remain stalled.
Also adding to the loss of momentum is a Chinese Government clampdown late last year that has slowed to a trickle the flood of private money previously flowing to property in such cities as Auckland, Sydney and Vancouver.
With average household indebtedness close to 10 times household income – making New Zealand the world’s most overvalued property market, according to the Economist last month – and interest rates starting to rise, this moment was always coming.
Andrea Rush, at government-owned Quotable Value, says values in cheaper parts of Auckland favoured by investors are still too expensive for many first-home buyers. “Prices are still too high mostly and there are reports that some deals are falling over at the finance stage due to stricter criteria from banks.”
The effect is most marked for property developers. “Even though we have an acute housing shortage in Auckland, the most difficult to find funding for now is new developments,” says Eaqub. “When the banks pull away credit, the first thing that goes is the riskiest elements of the market.
“We are going to have a construction bust before we have a housing bust. We haven’t built enough houses for a long time. And if we’re going to keep not building enough houses, I’m not confident that whatever correction we have in the housing market is going to last.”
In other words, is the current slowdown in both house-price inflation and construction a permanent change or a breather?
Labour’s housing spokesman, Phil Twyford, thinks it’s the latter. “The fundamentals are still: very low interest rates, very high immigration and this entrenched shortfall of housing,” he says – about 35,000 to 40,000 too few houses in Auckland now, getting worse by 6000 a year. “None of those things have changed. If we are seeing a pause, it’s only going to be temporary.”
For its part, the Government sees a huge bow wave of building activity coming to fruition, with consents for new homes in Auckland last year topping 10,000 for the first time in 12 years and 40 houses being built in the city every working day, “four times what it was when we were elected”.
Realtors Colliers International certainly see a wave of new apartments coming to market in the next few months, with 2270 apartments due for completion this year, the highest number since 2005, after which there was a marked slump, and 3840 apartments on the books for completion in 2018.
While all this may not be enough to fully meet demand any time soon, Building and Construction Minister Nick Smith has described this rate of expansion as being “as fast as you can practically grow a sector as large and as complex as construction without compromising quality”.
Banks are getting so nervous about the escalating cost of building and the unaffordability of existing homes they’re tightening up on lending.
BIGGEST SINGLE POLICY ISSUE FOR VOTERS?
Whether long or short term, the current pause is occurring in election year.
The assumption that rising house prices are the National Party’s primary bulwark against discontent over other issues, particularly high immigration, might start to peel away if house-price inflation doesn’t continue.
That makes housing the biggest single
Adding to the loss of momentum is a Chinese Government clampdown that has slowed to a trickle the flood of private money.
policy issue for voters, suggests Oliver Hartwich, director of the business-backed New Zealand Initiative think tank, which has spent much of its five-year existence examining how we got into this mess. “Housing is the central issue. House prices