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Has There Ever Been A Better Time To Build?

25 February 2009

This article examines the drivers behind the residential construction industry and poses the question of whether 2009 should be "the year of the build?"

Building Consent statistics continue to fall for new housing units.  1,127 units, (new dwellings and apartment dwellings) were authorised in December 2008.  This is the lowest monthly total since January 1987.

For the year ended December 2008 there were 18,456* new housing units authorised, down 7,134 from the previous year and well below the peak at the year ended December 2004 of 31,423*; a reduction of almost 13,000 dwellings and apartments.  The value of those Consents fell from $6.4 billion* in December 2007 to $4.9 billion* in December 2008.  For statistical purposes, within an apartment building each separate apartment is considered a dwelling.

(* Statistics as published by Statistics New Zealand)

The change in volume of new dwelling construction activity is clearly illustrated in the following graph:

The average volume of new dwelling Consents over the previous 12 years is 24,635.  This illustrates clearly that our residential construction industry has reached the end of a significant period of activity and that on a year on year basis the New Zealand market place, for the past 12 years, demanded a greater volume of new housing supply than is presently being created.

Underpinning those demand characteristics have been net migration flows of permanent and long term migrants to our country.  The graph below illustrates those flows and identifies that the peak occurred in 2003 and followed on from the tragic events of the World Trade Centre terrorist attacks.  This corresponds with the peak in new dwelling Consents the following year. 

Net migration flows do fluctuate with changes in government migration policy, but it is clear that as those migration numbers increase there is a corresponding increase in Consents for new dwelling units in the period following.  There is however a lag of up to 18 months for those changes to show.

Net migration numbers for the past 2 years are 12,081 in 2007 and 4,678 in 2008, for the year ended March.  By December 2008 net migration had reduced to 3,800.  If those volumes are related to the peak of 41,592 in 2003 we can begin to appreciate where new dwelling activity is headed. 

Some media commentators are suggesting that New Zealand may experience a surge in net migration numbers as a follow on to the world financial crisis we presently face.  Expat Kiwis may be encouraged to return to our shores in search of a more stable and secure economic and physical environment.  Potential new migrants may take this opportunity to "escape" their difficult economic conditions in North America, the UK and Europe to a perceived safe haven, provided of course that they can extract themselves financially and in relatively unscathed fashion, from their existing homes and businesses. 

That is a major downside of the deepening world financial crisis, where housing and businesses have taken a substantial hit or have become unsaleable in some locations.  This differs markedly from the post 9/11 period when property and capital markets were far more positive the world over. 

Other considerations will influence decisions about building and development in the New Zealand context. 

• Funding - access to commercial development funds is practically non-existent, while first time home builders are also experiencing great difficulty securing home loans with any less than a 20% deposit.  There are only a small number of financial institutions that will lend beyond the 80/20 threshold. 
• Unemployment - increasing uncertainty of job security looms as a potentially major factor.  Those contemplating building will be likely to defer such a decision until there is certainty in their employment.
• Current stock - in several localities of New Zealand there is a surplus of new housing stock already built, but unoccupied; that stock is largely the result of speculative development where market timing will dictate those developers either reduce prices to generate a sale or hold and rent to cover borrowing costs.  A greater choice of existing homes and apartments on the market also leads to reductions in demand for new housing stock.
• Land supply - anecdotal evidence gathered from throughout New Zealand indicates that there is a strong supply of available residential sections and larger lifestyle blocks in most locations.  While development of new subdivisions has slowed dramatically, the volume of section selling activity indicates that there is a good available supply in most areas for the next 12 months of building activity and beyond.
• Interest rates - for the private borrower interest rates are becoming very attractive having lowered significantly over the past 6 months and with expectations of further falls.  Those contemplating building a new dwelling would therefore have the opportunity of locking in loans for medium to longer terms and having some certainty of borrowing costs.  Commercial developers of new building projects are not as well served.  Interest rates are certainly low but access to funds is a significant negative issue, with little immediate relief in sight.
• Building costs - as workloads for residential construction continue to dry up there is a greater availability of builders and sub-trade contractors.  To maintain market share and have ongoing work for themselves and their staff, there will be a period of acceptance of lower margins and a close examination of staff numbers.  This will lead to reductions in building costs.  Latest statistics for December 2008 show a reduction in the residential building index with a 0.3%* fall.  This is the first time a fall has occurred since a 0.1%* fall in the December 1998 quarter. 

(Statistics as published by Statistics New Zealand)

Contributing to this latest fall are:

1. lower prices for reinforcing and structural steel.
2. reduced contractors margins and
3. lower prices for the construction of new homes overall.

So, has there ever been a better time to build?

In this writers view, the jury is still out.  As 2009 unfolds we will see a much clearer picture revealed.  Net migration numbers will confirm whether we are likely to experience a surge in migration this year and next, or a continued fall in those numbers.  For the commercial developer, speculative builder, and their bank manager there will have to be a positive change in those numbers.

Personal circumstances will dictate to those Kiwis contemplating building, whether now is the hour.  Do they have job security?  Have they sold their existing home and are cashed up?  Are they prepared to obtain multiple quotations on their new home plans to maximise on a competitive home building market?  Do they want to risk missing out on further possible falls in section prices, interest rates and building costs?

For those who can respond positively to the questions above the answer is to be ready later this year.  With the passage of time in obtaining Consents and start dates and the possibility of improved market conditions later this year and into 2010, it would seem the opportunity is imminent for those fortunate enough to be in a position to build.

Bryan Paul

This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.