Rescuing the residential building industry
Fri 3 Apr 2009 by Gareth Kiernan in Construction

The residential building sector is in crisis.   The rate at which we are expanding the stock of dwellings in New Zealand has plunged to a 65-year low.   Home builders and subcontractors are struggling to find work, resulting in job lay-offs and business failures over the last six months.

Confidence, or lack of it, is one of the key themes running through almost every facet of this economic downturn, and the residential building sector is no different.   A lack of confidence in the housing market has meant that potential buyers of new houses are staying away because they’re worried about paying too much for a house that might be 10-15% cheaper in a year’s time.   Concerns about property values have also discouraged banks from stepping into the funding breach created by the collapse of many finance companies during 2007 and 2008.   As a result, the cash flow of property developers has dried up from both directions, and the supply of new houses coming to the market has shrunk dramatically.

New Zealand’s prolonged recession has also had a dampening effect on underlying demand for property – people tend to opt for more crowded (and therefore low-cost) living situations in tough economic times.   But one emerging effect of the global recession is a reduction in New Zealanders heading overseas to live, and an increase in numbers returning here.   Higher net migration will place pressure on the dwelling stock, so even conservative estimates of underlying demand for new housing suggest we should be building around 21,000 new homes per annum, rather than the 15,000 that will be the case over the 12 months to June this year.

One of the obvious effects of under-building is the pressure it puts on house prices.   Prices have been falling since the end of 2007, but could stabilise as soon as mid-2009 given the increasing number of people competing over what is, at the moment, a constrained supply of property.   Tighter lending criteria and increased deposit requirements by banks may initially limit the extent of any subsequent pick-up in house price growth, but an end to house price falls represents a significant shift in sentiment from the prevailing pessimism of the last 18 months.

Improved confidence in house price prospects should start to see new house buyers come back into the market.  However, we have concerns about whether the industry will have the capacity to respond to increased demand.   The collapse of many developers and disappearance of finance companies has left a big gap in the institutional arrangements forgetting land developed and funding new properties.   The dramatic decline in residential construction activity has contributed to the biggest net outflow of building tradespeople heading overseas since 1980.   It’s also creating a hole in apprenticeships, undoing many of the gains made by industry organisations over the last decade in boosting training numbers.   Improved demand next year may not be matched by a lift in activity if there are no developers or builders to construct the houses.

Does the government have a part to play in assisting the industry through this difficult phase?   Three potential areas of work spring to mind.

  • Eight years after first coming to light, the leaky homes crisis is still dragging on.   Sorting out liability has proven to be a complex legal process, but it seems likely that government (local or central) will generally be forced to pick up some of the bill.   Putting a high priority on remedial work, initially funded by government but with liability issues to be resolved later, would increase demand for builders’ services during this period of weak activity.
  • The government’s $500m infrastructure package announced in February included $125m for state housing, with $20m allocated for building 69 new statehouses.   The latter figure is underwhelming when compared with the waiting list of around 10,000 for state houses, and there is room for a much larger government house building initiative given the collapse in residential construction activity over the last year.
  • Government policy potentially has a role to play in attracting New Zealanders back from overseas.   Fewer job opportunities offshore could make the government’s task easier, and building workers could be enticed back if there is sufficient work available in New Zealand.

These areas present opportunities to improve the quality and size of the country’s dwelling stock.   A state house initiative, in particular, would also increase the affordability of housing, through providing relatively low-cost housing for those most in need, as well as boosting the supply of property at a time when the market may not be functioning particularly smoothly.

If dwelling consent numbers remain around current levels, we risk experiencing another pick-up in house prices early next decade.   Given the problems caused by this decade’s housing boom, that’s an outcome that most policymakers, including the Reserve Bank, should want to avoid.

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