Westpac: Don’t expect an oversupply of houses
New Zealand’s massive shortage of housing has started to turn, but the country is not headed towards an oversupply, Westpac says.
Many years of under-building, particularly following the global financial crisis in 2008, meant supply did not keep pace with a rapidly growing population.
Between 2015 and 2020 the population grew by around 11%, but over that same period housing stock only increased by 7%, according to Westpac’s economists.
That imbalance left the country with around 75,000 too few homes, with the shortages most intense in Auckland.
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Westpac senior economist Satish Ranchhod said the imbalance had been rapidly eroded since the start of the pandemic and the shortfall had fallen by around 30,000 homes.
While that left a shortfall of around 45,000 homes, big changes around supply and demand were in train, he said.
Home building had surged, despite material and labour shortages slowing the completion of housing developments, while population growth had plummeted.
Net migration would eventually turn positive, but he expected it to settle at around 30,000 people each year.
“That’s a big step-down from annual inflows of 50,000 to 60,000 people in the years leading up to the pandemic. And the impacts of that change will be felt across the economy, including in our housing market.”
Housing shortages nationwide had now started to turn around, particularly in Auckland where the population dropped by 1300 people in the year to June 2021.
Ranchhod said Auckland’s shortage had fallen from around 35,000 homes at the start of the outbreak to around 15,000.
“There is still a way to go, but with building activity continuing to ramp up, the under-building of homes in Auckland is on track to be largely eliminated by the end of next year.”
Around the rest of the country shortages looked set to be largely eliminated in the next four to five years.
But even though home building was expected to remain strong as the existing shortages were eroded, he did not expect an enduring oversupply situation to develop.
“In most parts of the country, the current high levels of building are what is needed to take the number of homes per head of population back to the levels seen in the middle of last decade.”
The situation was more nuanced in Auckland where there was an outflow of its residents to other regions, he said.
“With the number of completed homes set to rise sharply, that raises the risk that the city could tip into oversupply within the next few years.
“We don’t think that would be the case for long: an abundant supply of housing would help to stem the exodus of Aucklanders, bringing demand and supply back towards balance.”
Despite the changes in supply and demand, and the expected easing of house prices, Westpac did not anticipate a significant improvement in housing affordability, Ranchhod said.
“Average house prices have risen by around 110% since 2015, and the expected easing in prices would only offset a portion of that. In comparison, households' disposable incomes have increased by around 50% since 2015.”
That meant price-to-income ratios were likely to remain highly stretched across many parts of the country, and saving for a deposit would still be a significant hurdle for many families, he said.
But some experts believed the country was still years away from having the amount of homes needed. Kiwibank chief economist Jarrod Kerr estimated there was still a 65,000 shortfall nationwide, with most of it in Auckland.
And economist Tony Alexander has said while discussion about over-building was likely to pick up pace this year, there was a fundamental shortage of social housing and entry-level housing.