ANZ has published a note explaining how New Zealand’s closed international border is rapidly solving the nation’s chronic housing shortage, which dramatically worsened over the past decade as immigration ran hot:
The closed border means the New Zealand housing market is in the rare position of being able to build enough houses to keep up with new demand…
For many, this [shortage] has eroded the Kiwi dream of home ownership, with the homeownership rate slipping from a peak of 73.8% in 1991 to 64.5% in 2018…
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On net, it looks like New Zealand will be able to chip away at the housing shortage pretty quickly over 2021, but it’s important to note that this progress is largely due to the border closure; without net immigration, the largest source of demand for new housing has been completely shut off. But this brief respite won’t last unless serious changes to immigration policy are made…
A timely indicator for this [supply] is the number of new dwellings that are being consented each month. These tend to be a leading indicator for how much residential activity takes place, since you need to get a consent before you can start building a house (figure 5).
Figure 8 shows the number of dwellings currently in New Zealand, as well as the average number of people per dwelling. We can see that the number of dwellings has actually been rising pretty steadily in recent years. However, the number of people per dwelling has also spiked since 2014, which can reasonably be interpreted as a sign that construction activity did not manage to keep pace with population growth turbocharged by high net migration…
Over the mid-2010s, there was a prolonged period where housing demand ran well ahead of supply. With the construction sector still recovering from the Global Financial Crisis and the resulting loss of capacity, and net migration increasing sharply, growth in the stock of dwellings lagged far behind demand for new housing…
In recent quarters, it looks like housing supply has finally started to significantly outstrip demand for the first time since the mid-2000s. However, if we look at figure 9, we can see that a large fall in population-driven demand is largely to blame, which can be pinned on the border closure. While the border remains closed, ongoing strong building activity will rapidly shrink the housing shortage (and this is one reason for our expectation that house price inflation will slow to a snail’s pace by the end of 2022).
The big uncertainty here is net migration. If previous immigration policies are restored once the border opens, then demand is likely to take off again… But we can say for sure that to sustainably improve housing affordability from a fundamentals point of view, either immigration policy needs to change, or serious gains in the responsiveness of housing supply need to be generated (or both).
Who would have thought: not running one of the world’s biggest immigration programs is the key to solving housing shortages. Wonders never cease.
This week Westpac’s economics team estimated that the Ardern Government’s policy reset should result in New Zealand’s post-pandemic immigration level being around half of its pre-COVID level.
If so, that would fix New Zealand’s housing supply issue once and for all.
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