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Just a Little Supply Issue

Posted by Aaron Tunstall on 14, Jul 2017

If the housing market is all about supply and demand, simply building more dwellings is an easy fix, right? Unfortunately, it’s a bit more complicated than that, writes Aaron Tunstall.


When market forces mean we can rarely afford to build them, any housing supply problem is going to have a very long tail

What has kept Auckland propety prices so high? The problem is “predominantly" a shortage of dwellings, according to Finance Minister Stephen Joyce. The main theme of the governemnt policy to counteract high Auckland values has been to encourage the construction of more dwellings. Simple, right? We just build more houses and the prices will steady out.

Unfortunately, even if you subscribe to the idea that more dwellings will solve the problem (I'd suggest that's another over simplification, but lets run with it), then the undersupply problem is here to stay for the forseeable future. Around 10,000 consents were issued last year for new dwellings and the rate of grwoth in consent numbers was considerably down on the three years prior. Forecasts have indicated Auckland needs more than 13,000 new dwellings each year to keep up with demand (other reports estimate that number at 18,000) , so we're a long way off, despite consents hitting a 12 year high.

In addition, we know that a buidling consent doesn't necessarily result in a building. Nowhere is this clearer than in the apartment sector where at least 353 projects were cancelled last year. Why were they cancelled? The high cost of construction and the difficulty in securing finance were two of the primary reasons these projects could no longer make the numbers work. All the friednly governemnt policy in the world can't overcome a negative numberat the bottom of a spreadsheet, whether you're building a minor dwelling or a 300-apartment development.


Apartment developements require enormous quantities of capital - I know one of Auckland's largest multi-unit projects had over $20million spent on it before the old buildings were even demolished on site. Finding a lender willing to help fund that type of expenmditure is only getting harder. The big banks are increasingly risk averse and once they have said 'No' to your big development, there are fewer alternatives than ever. Good luck crowd funding a $20million loan for an apartment building. And those construction costs aren't going to drop; it's much more likely that they'll keep rising. When you need to add those to the price of land in the supercity, the final figures are precipitous.


At the start of 2016 I predicted we would see apartment prices drop of flatline pnce all the new developments hit the market. Prices did flatline, but in my opinion mainly due to the Reserve Bank's restrictions on LVRs and foreign buyers. I've been surprised how little impact the new apartments seem to have had on the market. Our apartment rents aren't yet finalised for March, but my feeling is they have increased slightly on our previous peak from March 2016, while TradeMe asking prices on Auckland apartments nudged uo by 2.6% at the end of last year

Joyce feels that house prices have peaked. He may well be right. (From where I'm sitting, it feels as though rising interest rates will have the biggest impact on prices.) But I don't believe that Auckland's supply problem has been solved. Whatever you think about apartments, you can't escape the fact that small, compact units are the most effecient way to create new dwellings in a limited space and they provide a relatively affordable housing option.

When market forces mean we can rarely afford to build them, any housing supply problemis going to have a very long tail.


Aaron Tunstall is the general manager of award-winning Impression Real Estate, which specialises in property management and sales and manages over 1,500 Auckland Apartements

© 2017 Impression Real Estate Limited - Licensed Real Estate Agent (REAA 2008)