We’ve received feedback that our forecasts for new dwelling consents are overly optimistic given capacity pressures. In response to this feedback, we have created a supply-side model to help inform our residential construction forecasts.
Our core model is essentially a demand-based one. In most cases, the underlying fundamentals of population growth and interest rates are enough to inform us of what’s to come. But this approach only works if supply can keep up.
Recently, growth in consents has been hampered by shortages of labour, while bottlenecks in the materials supply chain and other factors can also play a role in limiting supply.
We discuss the results of our new supply-side model below. We will continue to utilise this model in forthcoming forecast rounds.
Constraints around the supply of labour look likely to persist for the foreseeable future, at least in some parts of the country – particularly Auckland, where our estimate of the housing undersupply is now in the 41,000-42,000 range.
The results of our modelling are shown in Graph 1. With our improved modelling of supply constraints, the annual total of new dwelling consents peaks at 34,828 in the September 2019 year, compared with a demand-based peak of over 42,000 consents in the March 2019 year.
The biggest downward revision to the forecasts utilising the supply-side model is in the March 2019 year. Unsurprisingly, the biggest contributor is Auckland, with almost 4,000 consents being lopped off activity over the 12-month period. But the dynamics of our model are such that demand pressures in Auckland will draw labour resources from other regions, thereby constraining activity in other areas that might not otherwise seem particularly stretched (eg Taranaki).
The regional breakdown of these downward revisions is shown in Graph 2.
Nationwide activity is forecast to ease from September 2019 onwards, because relief from capacity pressures in many regions does not easily translate into further increases in capacity in Auckland. This outcome is despite Auckland continuing to desperately need a higher rate of house building beyond 2019. It is possible that activity in Auckland can continue to expand over subsequent years, but our model enforces a relatively conservative view regarding how persistent the constraints will be at a regional level.
The total “shortfall” of housing by region over the five years to June 2022 is shown in Graph 3. The graph shows that supply constraints will continue to hold construction activity below demand levels beyond 2019 in Auckland, meaning that by mid-2022, the number of new dwellings consented in the region could be almost 10,000 lower than our “unconstrained” forecast published two weeks ago. In contrast, an easing in underlying demand levels in most other regions (eg Canterbury, Wellington, Otago) will enable catch-up to occur from 2020 onwards for the constrained build levels of the previous few years.
KiwiBuild in the context of the supply constraints
Given the supply constraints faced by the construction industry, it is also worth considering the effects of the government’s proposed KiwiBuild programme. Labour has stated that, of the 100,000 new homes it intends to build over the next decade, half will be built in Auckland. It’s not clear where the other 50,000 will be, but based on housing affordability and population pressures, we have compiled a possible regional distribution as shown in Graph 4.
Although Labour is trumpeting its aim of 100,000 additional homes, the reality is that a significant proportion of these dwellings would have been built anyway. So rather than dramatically adding to the number of new dwellings being built, Labour’s policy will change the mix of dwellings so that there is a larger proportion of more affordable homes being constructed. For example, discussion about Hobsonville as one of Labour’s possible sites reflects the partnership aspect of the KiwiBuild policy between the public sector and some existing private developments.
Given the supply constraints in the market, we estimate that over 80% of KiwiBuild homes built between now and 2022 will simply be a substitute for, or “crowd out”, private sector work that would otherwise have occurred. In Northland, Auckland, Waikato, Wellington, and Nelson/Tasman, we estimate that the crowding out will be between 90% and 100%. It is only in Tauranga, Greater Christchurch, and Queenstown where we expect there will be sufficient capacity for KiwiBuild to make a noticeable difference to build rates within the next five years.
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