Housing shortage

Following on from this mornings post on house prices, I thought I should touch on an article in the press today, about an upcoming housing shortage.

I’ll be honest here, terms like “housing shortage” and “over-supply” annoy me a bit – as what people are trying to say is that there are too many (or too few) houses to support the current price in equilibrium.

Now, at the moment “too few” houses are being built given what people perceive the equilibrium price to be. This price depends on the population inflow, and average number of people per dwelling, and the opportunity cost of the land.

I agree with this statement – house building has fallen way below sustainable rates. We didn’t even have an excessive amount of building going on in the first place in New Zealand, during the housing bubble, and as a result a “housing shortage” is a definite possibility.

However, I don’t think we can say that we will have a housing shortage and that house prices will fall 30% – which would take us back to the historical norm. If there are too few properties out there then we will see prices and rents get supported at some level ABOVE the historical norm – as there is a fundamental factor (the scarcity of housing) which supports these prices.

Discuss 🙂

  • At the moment there seem to be a lot of sections for sale (and some have been on the market for a long time) and increasing stories of firms in the building trade being short of work. Also there doesn’t seem to be much upward pressure on rents. With the supply of sections high and there being an over supply of builders, all those people working at the height of the boom that must include a surplus of labour above the ‘norm’, a shortage could be responded to pretty quickly.

    While we don’t have a US scale over supply there does appear to be a lot of real estate just sitting around at the moment. Clearly not a lot of people desperate to buy or, more importantly to this discussion, build.

  • “Clearly not a lot of people desperate to buy or, more importantly to this discussion, build”

    Indeed. But we have to ask why people aren’t building – what prices aren’t clearing such that there is a surplus of labour and resources just sitting around.

    Fundamentally, I think that costs in the construction industry rose so substantially, that the industry was unwilling to respond to the strong increase in our population in recent years, even with the price of property rising.

    Now we are in a situation where house prices are falling (reducing the return property investing builders will get – which has screwed them), banks won’t give property developers finance, and we have a surplus of labour that is unwilling to accept lower wage rates. All these factors create a situation where the market will be unable to build at the “optimal” rate.

    The credit rationing in this industry is the reason the build rate has fallen so sharply – and the sharp fall off in the build rate will create a floor for prices to hit, as people find there isn’t the supply of housing available that they want.

    Currently prices are still above this floor – because of some messed up initial expectations in the market about the growth of house prices over time. However, inventory levels are falling and I can imagine the industry settling with a median price of around $300-310k (say a 15% price fall), as compared to the current expectations out there that it will fall back to $250k.

    The sole reason for this is that builders are unable to build. If labour was priced properly, consent costs were low, and credit was available the build rate would be higher and a 30% decline in property prices would be highly realistic. However, I doubt that the market for labour, credit, and government regulation is going to clear – and as a result prices will settle at a higher level to incentivise building activity.

  • Good point.

    One could have equally said “There has always been an excess of housing because I want the median house price to be infinite.”

    What does “sustainable rate” mean? Above the long-term trend? Above the rate necessary to see house prices go up by 5% per annum. 10%, 20% or -20%?

    However, the discussion seems to be lacking an appreciation of the dynamics. The HOPE scheme is intended to last 4 years – and then what? Will population growth have slowed enough by then to mean houses remain affordable or will demand then drive prices up?

    I really hope The Press was quoting Eves out of context when he said: “If we get into this rollercoaster of under-supply and over-supply again, it just makes the whole market volatile and we could have another bubble.” A bubbly roller-coaster…. sounds like something Jamie “Chicken Man” Oliver would say, innit.

  • John

    I notice that automatically generated link about house prices and migration, stating that there is no link. I recall Br Bollard and others saying their clearly was and the link was strong. Are government reports reliable?
    http://workinginnewzealand.wordpress.com/2008/06/09/migrants-do-not-push-house-prices-up-report-finds/

  • John

    Which policies should have preference maintaining affordability or supporting economic growth through migration: the high and mighty drive for economies of scale and a knowledge based economy?

  • Hi Dismal,

    The HOPE scheme is just political punditry – they need to deal with fundamental issues of building costs before they can look at truly improving housing affordability.

    Hi John,

    Government reports are definitely reliable. I haven’t read that report in a while, but I was under the impression that “some” of the increase could be put down to the size of the net migration inflows – after all, they determine how quickly population is growing.

    However, in the current case there are more important supply factors – and the fact that we had a housing bubble. It would be an interesting thing to do a detailed analysis of.

    “Which policies should have preference maintaining affordability or supporting economic growth through migration”

    The goal is to maximise welfare for people in New Zealand right. In that case, I would say that if we are going to target an abstract goal it should be GDP per captia. Migration doesn’t necessarily help or hinder this, and housing affordability in itself is a misnomer – given that the price being paid has to be related to the value the person places in the house (except when expectations go awry).

    As a result, I wouldn’t look at targeting either.

  • “The HOPE scheme is just political punditry ”

    It’s welfare by lottery. 1500 households lucky enough to win a ballot get rent free use of Crown land in perpetuity, while the other 1,998,500 households find the Crown has lost tens millions in potential annual revenue. Worst of all the households that are earning enought to borrow for building a house aren’t the people most in need of housing assistance – why not just build more stae houses if you want to affect the supply.

    Back on topic, I wonder if we may see a bit of a change in the finanacing off new housing. While developers likethe Brooklyn Rise crowd, that brought down Lombard Finance, might be disappearing we may see more of the traditional subdivide a sell sections and the building done more by contract builders working to the final buyer.

    I think the construction industry is more flexible part of the market right this moment, the roadblock being those currently holding developable land who aren’t yet willing to meet the market – a bit like the inadvertant landlords who’ve entered the rental market recently.

  • “I think the construction industry is more flexible part of the market right this moment, the roadblock being those currently holding developable land who aren’t yet willing to meet the market – a bit like the inadvertant landlords who’ve entered the rental market recently.”

    Very interesting – so are you suggesting that people are willing to build at a price that would clear, but that there is a bottleneck in the sale of sections. That makes sense – and is consistent with the idea that a lack of house construction will lead to less of a fall in house prices.

  • “so are you suggesting that people are willing to build at a price that would clear, but that there is a bottleneck in the sale of sections.”

    Yup – I suspect people won’t be holding off for cheaper construction costs, although any reduction in general demand should create reductions in a variable cash flow business like building. I’d describe the housing ‘bubble’ as really a bubble of land prices rather than of bricks and timber. So what could prick the bubble would be supplies of land coming on to the market as speculative investors need cash.

    I recall Kerry Prendergast refering to land banking as being a restriction on development in Wellington rather than the urban limits – LGNZ has also mentioned it – http://www.lgnz.co.nz/library/files/store_016/SubmissiontotheCommerceSelectCommitteeInthematterofAffordableHousingInquiry.pdf – Page 6.

  • “I’d describe the housing ‘bubble’ as really a bubble of land prices rather than of bricks and timber”

    Indeed – I think that is an apt characterisation, especially given that section sales have collapsed over this year.

    However, when we look at the price of a house the cost of building a property on the land must also come into consideration – if the cost of building (including the purchase of land) does not come down this will help to hold up the price of established dwellings.

    Fundamentally, there is a whole lot of land out there being held at ridiculous prices – but even if this market moderated, it still takes time to build the houses, a factor which, in of itself will help to support prices (as it takes time for the stock to adjust).

    We did not build ourselves into an “oversupply” situation – so our adjustment, relative to places that have “overbuilt” should be smaller. That is the single point I’m trying to make here – as people keep saying “the US has declined 30% therefore we will” 😛