Rescuing the residential building industry

The residential building sector is incrisis.   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 strugglingto find work, resulting in job lay-offs and business failures over the last sixmonths.

Confidence, or lack of it, is one of thekey themes running through almost every facet of this economic downturn, andthe residential building sector is no different.   A lack of confidence in thehousing market has meant that potential buyers of new houses are staying awaybecause 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 discouragedbanks from stepping into the funding breach created by the collapse of manyfinance companies during 2007 and 2008.   As a result, the cash flow of propertydevelopers has dried up from both directions, and the supply of new housescoming to the market has shrunk dramatically.

New Zealand’sprolonged recession has also had a dampening effect on underlying demand forproperty – people tend to opt for more crowded (and therefore low-cost) livingsituations in tough economic times.   But one emerging effect of the globalrecession is a reduction in New Zealanders heading overseas to live, and anincrease in numbers returning here.   Higher net migration will place pressureon the dwelling stock, so even conservative estimates of underlying demand fornew 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 thisyear.

One of the obvious effects ofunder-building is the pressure it puts on house prices.   Prices have beenfalling since the end of 2007, but could stabilise as soon as mid-2009 giventhe increasing number of people competing over what is, at the moment, aconstrained supply of property.   Tighter lending criteria and increased depositrequirements by banks may initially limit the extent of any subsequent pick-upin house price growth, but an end to house price falls represents a significantshift in sentiment from the prevailing pessimism of the last 18 months.

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

Does the government have a part to playin assisting the industry through this difficult phase?   Three potential areasof work spring to mind.

  • Eight years after first coming to light, the leaky homes crisis isstill dragging on.   Sorting out liability has proven to be a complex legalprocess, but it seems likely that government (local or central) will generallybe forced to pick up some of the bill.   Putting a high priority on remedialwork, initially funded by government but with liability issues to be resolvedlater, would increase demand for builders’ services during this period of weakactivity.

  • The government’s $500m infrastructure package announced in Februaryincluded $125m for state housing, with $20m allocated for building 69 new statehouses.   The latter figure is underwhelming when compared with the waiting listof around 10,000 for state houses, and there is room for a much largergovernment house building initiative given the collapse in residentialconstruction activity over the last year.
  • Government policy potentially has a role to play in attracting NewZealanders back from overseas.   Fewer job opportunities offshore could make thegovernment’s task easier, and building workers could be enticed back if thereis sufficient work available in New Zealand.

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

If dwelling consent numbers remain aroundcurrent levels, we risk experiencing another pick-up in house prices early nextdecade.   Given the problems caused by this decade’s housing boom, that’s anoutcome that most policymakers, including the Reserve Bank, should want toavoid.

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