Residential construction picked to double

Fairfax Media

GOOD NEWS: A dearth of new housing construction is being credited with preventing major housing price collapses during the recession.

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The New Zealand housing market may be on course to mirror Sydney, where prices have been stagnant for most of this decade.

A dearth of new housing construction in New Zealand is being credited with preventing major housing price collapses during the recession and an expected turnaround in supply in the next 18 months could stall future price increases.

Housing prices have fallen about 11 per cent since their 2007 highs, but the latest price figures from Quotable Value indicate that they have begun to creep up in the last three months.

However, economists are dampening expectations that another housing bubble is forming, saying a slack construction sector could accommodate a surge in home building, which would reduce pressure on prices.

Bank of New Zealand economist Craig Ebert is predicting residential construction could double in the next 12 to 18 months. He says there are already signs that construction is picking up again, although off extraordinarily low levels.

Westpac economist Dominick Stephens says the likely rise in housing construction in the next 18 months places our housing market in the same situation as  Sydney's, where prices have been stagnant for years.

Despite a surge in net migration levels since their lows last year, the higher number of people in the market for a home will be countered by an increase in new housing construction, Stephens says.

"Last time we had a migration boom [in 2002], there was little labour around and builders could charge whatever they wanted to, which drove up prices.

Statistics New Zealand figures show July-year net permanent and long-term migration rose to 14,500 from 5200 a year earlier, the highest annual figure since December 2006.

Goldman Sachs JBWere analyst Bernard Doyle notes net migration over the past six months has averaged 25,000 on an annualised basis. The last time net migration was at these levels, total new building consents (those built for migrants plus those for locals building a new house and/or upgrading their old home) hit 24,000, Doyle says.

However, Stephens says this should not lead to rapid house price inflation. "We're now entering a housing shortage situation, where there is no obstruction to the construction industry ramping up production, because the recent sharp rise in unemployment means labour for construction is readily available."

The return of a strong housing construction industry was reflected in this week's National Bank business outlook. It showed a net 48 per cent of survey respondents believed better times were ahead for residential construction, the highest level since 1994.

This, combined with the large mismatch between house prices and fundamentals, such as rental income ratios, interest rates and household incomes, could make for a Sydney-style housing price stagnation.

"It looks as though we'll have the scenario that we saw in Sydney earlier this decade, where house prices fell 10 to 15 per cent in 2003, and then were  flat for a good four or five years after that," Stephens says.

Ironically, Ebert says extremely weak housing construction over the last two years has deflected the worst of house price falls.

"Had construction and the listing of existing homes maintained their normal pace over the last two years, house prices could easily have fallen more than 20 per cent by now."

Housing consent data from Statistics New Zealand shows the number of issued consents was 38.1 per cent lower in the year to July 2009 than in 2008, when figures were 15.1 per cent lower than 2007 levels.

The June 2009 year figures were the lowest annual number for a June year since Statistics New Zealand's monthly series began in April 1965.

But the July 2009 monthly figures show a 5 per cent rise to 1214, a sign the construction industry is close to a turning point, according to ASB economist Jane Turner.

- © Fairfax NZ News