Construction ‘Reset’ Needed To Help Housing Market In 2022

Housing

House prices surged and the public housing waitlist ballooned in 2021 – and with record construction demand set to continue in 2022, one economist says some big-ticket projects may need to be dropped to help keep house building on track

In recent years, predicting where the housing market will head has proved a fool’s errand.

In its half-yearly update at the end of 2020, the Treasury projected house prices would rise by 8.5 percent in the year ending June 2021; instead, they grew a whopping 29 percent, defying the Covid-19 pandemic and sparking further concern about overheated numbers.

So even though a number of economists and commentators are predicting a cooling market in the coming year, it is little surprise Housing Minister Megan Woods is reluctant to gaze too precisely into her crystal ball for 2022 when speaking to Newsroom.

“The short answer is we know there’s headwinds coming, but no one’s entirely sure what that’s going to mean – when you think about only a year and a bit ago, people were prophesising the crash of the housing market and we saw the absolute opposite happen.”

Infometrics principal economist Brad Olsen is among those expecting house price growth to “flatten back quite considerably” in the face of rising interest rates and government policy changes, albeit offering little consolation to aspiring homeowners still looking at prices up 30 percent on pre-pandemic levels.

Woods is positive about what she describes as “green shoots” in the market, with both record numbers of consents and an increase in the construction of multi-unit dwellings which offer both a more dense and affordable option for Kiwis.

But the wider picture is not an entirely rosy one as National housing spokeswoman Nicola Willis points out, with the public housing waitlist roughly tripling in the last three years and the number of people in emergency housing also booming.

Woods is similarly concerned about those numbers, but gives short shrift to the idea that the problem is entirely one of Labour’s making.

“I think [the waitlist] for the first time in a decade reflects real need: if you imagine that all these people suddenly just somehow were created post-2017, then you’re certainly burying your head in the sand to what the situation actually was like before.”

“Today, the average house is nine and a half times the average income, so for someone trying to save up a deposit to enter the market … for a median house of $925,000 they’re looking at $185,000 deposit – that’s a huge amount of money to save, particularly in a market where price inflation is outpacing wage growth.”

One of the policy changes which could have the biggest impact on the housing market in 2022 is largely out of the Government’s hands.

The Reserve Bank’s restrictions on lending to borrowers with deposits of less than 20 percent have already led to a number of banks “pausing” low-deposit loan applications, and Willis is concerned aspiring first home buyers will be worst affected.

“Today, the average house is nine and a half times the average income, so for someone trying to save up a deposit to enter the market … for a median house of $925,000 they’re looking at $185,000 deposit – that’s a huge amount of money to save, particularly in a market where price inflation is outpacing wage growth.”

Olsen doesn’t see the LVR change as “the end of the first home buyers’ dream” in and of itself, but instead yet another addition to the overwhelming pile of obstacles to those looking to own a home of their own.

Woods is relatively optimistic about the state of play for new entrants, noting first home buyers have made up an increased share of the market in recent statistics – albeit, as Olsen points out, within a smaller level of overall sales.

Finance Minister Grant Robertson has also made clear the Government’s view that any such tools deployed by the Reserve Bank should not “unnecessarily disadvantage first home buyers”, she says.

Where Woods and Willis are both in agreement is on the importance of the Government’s loans and grants for first home buyers.

The National MP sees that support as increasingly important, while the Housing Minister will take an update to Cabinet early this year on the impact of the measures and how to improve them (last March’s increase to income and house price caps was rapidly rendered out of date by the overheated market).

“One of the problems is that the way that those products have been set up, it’s been ad hoc that a minister’s taken it back to Cabinet, so we want to have a look at a more regularised cycle of taking that back … there’s a fine balance there because you don’t want to drive prices up, but you certainly don’t want to make a product that just isn’t capable of supporting first home buyers.”

Olsen is keeping a close eye on whether the Reserve Bank chooses to use another policy tool in 2022 – debt-to-income restrictions which would restrict the amount of lending banks can provide to house buyers whose total debts outstrip their income by a set ratio.

The Reserve Bank successfully lobbied for the Government to give it the ability to pose such restrictions, although as with LVRs, Robertson has indicated he would not want any clampdown to affect first home buyers where possible.

That could prove difficult, given a conflict between the negatives of hampering first home buyers and the benefits of protecting them against risky lending.

“As much as we want to get Kiwis into a home, I think we should tread carefully with the idea that we should have first home buyers taking on any level of debt, at any risk, just to get into the market,” Olsen says.

“Do we need 20-odd convention centres located every few kilometres around the country, or should we build other things first?”

Further uncertainty for the housing market comes from ongoing disruptions to global supply chains, which have already affected construction projects here and will endure through 2022, if not longer.

Willis’ concerns are not just about the sheer availability of supplies, having already heard from large-scale property developers unable to secure the materials they need, but the “massive cost inflation” likely to result.

“That has a couple of impacts: one, of course it pushes up the price of new homes but two, it creates real uncertainty in contracts for those people who are buying homes off the plans, and I’m really worried about the destabilising influence that could have.”

Woods says the Government is alive to those risks, with the Ministry of Transport leading work on a supply chain strategy and separate efforts underway with Building and Construction Minister Poto Williams to develop a list of potential substitutes for products which would normally be required to meet building standards.

But with a perfect storm of incredibly high building demand and incredibly low supply, Olsen says the Government may need to look at a reset of its construction priorities – along with local government and the private sector – to take the sting off materials shortages.

“Do we need 20-odd convention centres located every few kilometres around the country, or should we build other things first?”

He believes that reset should extend more widely to the country’s cultural affinity for high house prices, pointing to the significance of Prime Minister Jacinda Ardern’s comments to RNZ that the market needed to come back from its record rate of growth.

“It’s important to shift the entire market’s expectations of sustained high levels of growth when it comes to housing.”

That is easier said than done, and the Government will need to put action behind its rhetoric if Woods’ ‘green shoots’ are to bear fruit.