The success of Jacinda Ardern’s Labour Party in managing the Covid-19 pandemic stands in stark contrast with its failure to adequately address the worsening housing crisis in New Zealand. Improving housing affordability was a key policy promise following Labour’s 2017 election victory, with pledges to increase housing stock through the Kiwibuild programme and crack down on speculative activity. However, only a fraction of the targeted 100,000 homes were built under the Kiwibuild programme before its revision in late 2019.
Additionally, the accommodative monetary stance and easing of macroprudential regulation over the course of the pandemic have substantially increased speculative investment in the housing market. The Reserve Bank of New Zealand (RBNZ) cut the official cash rate by 75 basis points in March 2020 to 0.25% and eased loan-to-valuation ratio (LVR) restrictions in May.
House prices have soared in response, with the median national house price increasing by 22.8% year on year (YOY) in February 2021, following a 19.3% YOY increase in January, according to the Real Estate Institute of New Zealand (REINZ). The volume of house transfers also rose significantly, with YOY growths recorded every month since July 2020. Unsurprisingly, transfer activity in Auckland was both more resilient in the downturn and more buoyant to the recovery.
New Zealand, Home Transfers, Percentage Change YOY
Source: Statistics New Zealand
Runaway house price inflation has drawn the attention of both the government and the RBNZ. Measures taken in response to the downturn last year are to be reined in, with LVR lending restrictions reimposed in March 2021. LVR lending restrictions will be increased to 60% for non-owners and occupiers in May. Furthermore, the government has updated the RBNZ’s Monetary Policy Committee (MPC) remit, including an expectation that the MPC should assess the impact of its decisions on government policy, stated as support for ‘more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.’
While these measures will go some way in restraining demand-side inflationary pressures, they fail to tackle the underlying issue of a persistent lack of supply. Additionally, given the downward stickiness of house prices, demand-side measures, without meaningful supply-side improvements, will struggle to noticeably improve the affordability of the existing housing stock.
Fiscal measures to address the housing crisis include an NZD5bn (US$3.6bn) commitment to construct 8,000 social houses by 2024, which is in addition to the 10,250 houses proposed since the 2018 budget. However, with 22,521 households currently on the social housing waiting list, these targets seem less than sufficient. Nevertheless, there are some encouraging signs that residential construction has gained momentum in the latter half of 2020. The floor area of the new building consents has undergone consecutive YOY growth since September 2020. A similar trend can be seen in the number of new residential building consents.
While tackling the housing crisis will necessitate substantial investment in the residential construction sector, solving the problem will require a multifaceted approach. Easing building regulations to accommodate greater private sector development is one potential avenue for exploration, as is the development of less urban areas. Property as a store of value is a major influence on the purchasing decisions of many homebuyers, but so are factors such as commute times, access to quality education and proximity to shops and commercial infrastructure. Attracting homebuyers to less urban developments, built on cheaper land parcels, by improving regional transport links, investing in local schools and developing commercial infrastructure is key to boosting both the affordability of homes in New Zealand and tempering demand in major urban areas.
New Zealand, Floor Area and Number of New Residential Building Consents, m² (000s), Percentage Change YOY
Source: Statistics New Zealand