The political call is for housing that’s more affordable, and more of it. Construction costs militate against the first hope, and a combination of central bank constraints & tightening of commercial bank asset quality ratios is likely to deal with the second.
Auckland specialist apartment agency City Sales, headed by Martin Dunn, has produced its own research – out today – which indicates an easing in supply over the next 3 years and a sharp drop in supply in 2021.
The graph shows a dead market post-global financial crisis, returning to life in 2015 and growing strongly for the last 2 years. This year Mr Dunn expects close to 1500 completions, falling to a range of 1000-1300 over the next 3 years, then dropping sharply to fewer than 500 as regulatory constraints have their impact.
Off-plan stock unsold after regulatory changes
Mr Dunn said the agency’s research was based on fact, not hope. Already, the agency has had parcels of unsold off-the-plans stock in new developments to take to the market after investors failed to proceed with their purchase.
Some had borrowed for their deposit and were unable to produce the balance. Others had to walk away because of the 40% equity ratio now required of investors.
He expects more of that as new developments are completed, and said this week the impact would result in a marked slowdown in development.
“The banks call the shots on supply,” Mr Dunn said in his latest market report.
The big 4 New Zealand banks are Australian-owned, and the Australian Prudential Regulatory Authority warned them at the end of July that it would require common equity tier 1 capital ratios of at least 10.5% to meet the authority’s “unquestionably strong” benchmark. That meant all had to tighten their lending and adjust the ratios for different market sectors.
Mr Dunn said City Sales had assessed proposed developments – many not yet unveiled – and determined the likelihood that they’d proceed.
One unknown at the moment is the amount of Chinese money available to China’s overseas developers. Already the screws have tightened on the availability of funds to individuals buying outside China for investment, but the position for developers has been varied.
Other market factors
Other market factors are the returns to investors – who have been integral to making any apartment development work, because they form about 80% of the market, but may have their domination reduced – and development costs.
According to City Sales’ market report – based on figures from its own transactions dating back to 2005, including sales of both new apartments & secondary stock, and from its property management business – average sale prices would continue upward: “Uber, electric cards, congestion & Boomer empty nesters are normalising Auckland central living and it’s an exciting moment. Have a look at K’ Rd these days.”
Mr Dunn said prices of the top secondary stock had eased recently, from $10,000/m² to about $8500/m² as sales volume dropped: “Uncertainty often ‘pumps the brakes’ on a largely investor-driven market, however City Sales sees activity returning to a familiar pace in the coming months.”
Finance, the investor as predator, contributing costs
The City Sales picture is accurate as the market stands. Politicians & bankers can change that overnight. They can also get things wrong, especially when they’re arguing for more supply but activating supply-reducing measures.
One of the ironies has been the clamour to lock investors out. Auckland would have no apartments in its city centre without investors, who were sought in presentations locally, in Singapore, Kuala Lumpur, Hong Kong & London over the last 20 years.
Investors in suburban homes have always made up a proportion of the market – as low as 30%, currently about 40%. Their presence has ensured there’s a stock of upgraded homes, something the management of Housing NZ by political windchange has ensured has not been the case with the state-owned stock.
The biggest change has come with the advent of the international investor, seeking to pop money into whichever market offers the best speculative opportunity. Auckland, Australia’s eastern state capitals & some Canadian cities have been prime targets.
That investment is easily regulated. Outside the investment in both new & existing stock, the other 2 cost issues are land price & construction cost. In Auckland, the greater ability to build more intensively through a wide swathe of suburbia will gradually change land costs, more than removing urban boundaries on the perimeters, where major infrastructure installation is required first.
And construction cost? Fletcher Building Ltd took the smart step long ago to create a vertical supply chain, something which makes it hard for any newcomer to match at any supply point. That vertical integration plus the lack of competition generally make it hard to lower material costs, while the construction sector has been slow to adapt to new ways.
Attribution: Discussion, City Sales report, APRA.