Christchurch's housing paradox – the downside of a building boom
Christchurch's rental market is oversupplied and freshly-built terraced houses are sitting empty and unsold in the suburbs. How did the city with the real estate market decimated by the earthquakes get here? MICHAEL WRIGHT reports.
Last month, Mike Blackburn bought a house. He and his wife looked at about 40 properties before settling on one. As they traipsed through the preceding 39, a pattern emerged.
"Every second house we looked at was empty," he said.
"That's just a telling figure. Where have all these people gone?"
The significance of what he saw wasn't lost: Christchurch, the city once desperately short of houses after thousands of them were wrecked by earthquakes, had a lot more accommodation than it used to.
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Blackburn is a management consultant, specialising in construction clients. When small or medium-sized operators are struggling, they go to someone like him for advice on how to get through. As part of his work, he gets the raw consenting data from the Christchurch City Council each month – location, builder, value, type of consent (earthquake or business as usual), intended use – to build a picture of the marketplace. He saw a clear vision.
"There was a major rush, mostly by the group home builders, to build a lot of houses really quickly," he said.
"What's happened is now everyone who's needed a house has pretty much got one and they're still building them. They're building them flat out . . . all these development companies are month after month submitting 20-30 consents each for essentially spec housing."
The numbers have tapered off of late. The council peaked in 2014 at more than 3200 consents issued – about 270 a month – before drifting back down to just over 2100 last year. 2017 is already tracking below that. As Blackburn sees it, though, the damage has already been done.
"There will be a correction. The number of buildings and the total number of dwellings being built will fall off really rapidly. It'll go below that business as usual level, because we've got a major oversupply at the moment. Potentially that effect could run on for the building sector in Canterbury for the next two, maybe three years."
There are other indicators. Anecdotally, rental properties are in such abundance landlords are dropping prices and offering incentives to secure tenants. This week, Stuff reported on swathes of empty multi-unit houses languishing in suburban subdivisions. "[We] certainly won't be building any more of those," construction boss Mike Greer said at the time.
Then there is the data. Compare Government valuer QV's latest monthly average house values for each region against last February and Christchurch does not do well. QV measures the city in six disparate parts and they all appear in the bottom 11 spots for value increase [three of the other five are the Selwyn, Waimakariri and Ashburton districts]. Rises in the Christchurch zones range from 0.7 per cent [east] to 3.9 per cent [southwest], which barely registers against most of the rest of the country; basking in double-digit growth all the way up to an eye-watering 29.5 per cent jump in the Queenstown-Lakes district [average house value $1,039,434].
"People have gone, in my mind, somewhat berserk in building new, to try and fill that [housing] void," Canterbury Registered Master Builders president Ivan Stanicich said.
"Some of the bigger building companies in Christchurch grew exponentially, hired more and more people and that was only ever going to be for about a three-year sweep. Now we're seeing the reverse of that where building companies are actively downsizing. That's well known in our industry. Nobody wants to shout that from the rooftops, because it's not a positive business outlook, but it's quite understandable. If you don't, any gains you've made through the building boom, they're just going to be lost in your overheads."
Property manager Tony Brazier saw the problem coming. In October 2014 he penned a column in The Press warning of the dangers of over-building. "The housing rebuild must be carefully monitored so we do not end up over-supplied," he wrote. "This phenomenal house building pace should alert us to the fact that, whereas in the past it takes only a few builders struggling to sell their new-builds to signal an end to the cycle, this time could be different. It may take large contractors not being able to sell whole subdivisions before the message gets through."
This at a time when Christchurch was only about halfway recovered from a chronic shortage of rental properties post-earthquake. Brazier knew this. He has kept a monthly record of rental vacancies on the Trade Me website since 2008. Graphed from pre-earthquake, the numbers form a neat parabola through the post-earthquake freefall and recovery up until about late 2015, when the curve disappears up the y axis. In December, Trade Me had 2013 rental listings for the city, nearly four times its offering at the depths of the shortage. According to the Ministry of Business, Innovation and Employment (MBIE), the average rent in Christchurch is falling for the first time since records started in 1993.
"We've got an oversupply now," Brazier said, "It's bad enough. We don't want it getting any worse. They should have stopped supplying the rental market a while back."
How did it come to this? The first answer is earthquake insurance money finally caught up with, and overtook, the market. As Stanicich said – builders going berserk trying to fill the housing void.
In the meantime, claims were settled and damaged stock repaired. An unforeseen element of this was the brisk trade in as-is, where-is houses – earthquake casualties that were uninsurable but livable. Landlords snapped them up and, in a stressed rental market, had no problem finding tenants. The by-product was Christchurch's housing stock ended up not quite as depleted as first thought.
Market forces were also promoting even more building. The Reserve Bank's loan-to-value ratio (LVR) restrictions on banks lending to home buyers exempted new builds. A home buyer generally needed a 20 per cent deposit, but a home builder could get finance with much less. Christchurch, in the middle of an insurance-driven building bonanza, didn't need that kind of encouragement.
"Last time I looked you can . . . [get a mortgage for a new build] on a 5 per cent deposit," Christchurch real estate agent Daniel De Bont said.
"I think there's a real two-tier playing field. You've got people out there building houses because it's easier for them to get into that with the lower deposit, but that's adding to the supply, and will they potentially be in negative equity by the time they build that property?"
None of these trends are easy to reverse. Changing the direction of a construction market is like turning around an oil tanker. It takes time.
"It would be lovely to say, 'Stop', and everybody stops, but you can't do that," Brazier said.
"We only see the market having gone too far when we see builders going bust. They don't know until it's too late . . . they have a long time lag for work to be done."
All this may put the brakes on some prospective developments, but there are others that must be fulfilled. The east frame anchor project, already much-delayed, is one. If chosen developer Fletcher Building was biding its time, waiting for an opportune moment to deliver 900 central city apartments and townhouses to the market, it may be waiting a while.
The company was unconcerned, saying the project was "a unique opportunity to provide an inner city development of a size and scale not seen in Christchurch before".
"With this comes the ability to create its own micro market," chief executive of residential and land development Steve Evans said.
"The project is a long-term one which will take several years to complete and over that time the market will most likely experience fluctuations in both demand and prices. Fletcher Living has seen market fluctuations before and is well experienced is dealing with such conditions."
The first 20 homes will now be ready by May next year. Two more tranches were scheduled to begin construction in 2017, Evans said.
If the pendulum has swung too far on Christchurch's housing market, it will swing back. Tony Brazier remembers a similar situation in the mid-1990s, when baby boomers, stung by the sharemarket, decided apartments were the next big investment thing. Builders, in turn, responded to the demand, but everybody soon found that there weren't enough Gen Xers around to rent them to. The market went flat, but it recovered.
"We're possibly looking at a similar scenario at the moment," Brazier said.
It could be worse. House value rises between 2 and 4 per cent might look soft against the rest of the country, but at least they're not going backwards. And Christchurch's population has only just recovered to its pre-earthquake level, so there is finally some capital growth to look forward to there.
"I don't see where we are as a negative," Hamish Wheelans, director of residential property developer Gillman Wheelans, said.
"We still had a reasonable year last year, from a sales perspective. It's more to do with the type of product and the location of the product."
Townhouses, especially in far-flung suburbs like Halswell and Pegasus, were always a risk, he said. The people who want those also want amenities nearby. If you build the right thing, buyers will still come.
"We put 25 sections [in Halswell] on the market last week and had 20 of them sold within hours. That doesn't really tell me the market's gone quiet and there's an oversupply. Certain areas of the city there is still high demand for."