Caveat on house building: Supplies and labour shortage

While the country’s borders are closed and immigration is virtually non-existent, the country has a chance to catch-up on the housing shortage.

The ANZ Bank’s Property Focus report says the construction industry is running into acute labour and materials shortages, which are boosting costs spectacularly and delaying the rollout of new housing.

The report says it is widely accepted the country’s housing affordability issues fundamentally stem from a lack of houses. ANZ estimates there is a shortfall of 70,000 houses.

That means, depending on the ability of the construction sector to meet demand, it could take another three to five years just to clear the housing shortage that’s accumulated since 2006.

The housing shortage is dropping by about 5,000 houses per quarter.

But ANZ chief economist Sharon Zollner says there are serious question marks about the construction sector’s ability to deliver the record-high number of dwellings that have been consented this year, given materials shortages and labour supply constraints.

Zollner says it has become difficult and expensive to find the raw materials needed to build houses.

Covid-19 has disrupted international supply chains and driven up the price of raw materials such as timber. This is adding both time and cost to building projects.

“Even if developers can source the resources needed to build, it’s become a serious challenge getting enough people into the industry to actually build houses at the planned rate.

“With the border closed, and the domestic labour market significantly tighter than anyone expected it would be a year ago, available and suitably skilled workers are challenging to find.”

Record job adverts are being posted by the construction sector, and there have been solid increases in employment, even over 2020, Zollner says.

“But anecdotes of severe labour shortages, as well as evidence from business surveys, suggest that hiring levels have not kept up with the demand that’s coming from the huge pipeline of residential construction activity.”

‘In a bind’

“The supply side of the housing market is definitely in a bind. These supply issues are unlikely to be resolved as long as the border remains closed.

“Project delays could cause cash-flow issues for firms that complicate the picture further.”

Overall, the fundamentals of the housing market point to a significant softening in housing demand over coming quarters, says Zollner.

She says with population growth slowing, macroprudential policy tightening, recent Government policies making it tougher for investors, interest rates bottoming out, and affordability constraints biting, it’s difficult to envisage demand maintaining the kind of momentum seen during 2020.

“That said, there’s still room for animal spirits and fear of missing out to see demand continue to run in the opposite direction to the fundamentals for a while yet.”

Reserve Bank weighs in

In its recent quarterly Monetary Policy Statement, the Reserve Bank also believes the days of the soaring house price party are over.

In a cautionary note, governor Adrian Orr says there is a risk house prices will fall from their existing levels.

He says it is becoming increasingly clear some of the factors supporting rampant house price growth may be reversing and are unlikely to support sustained growth.

Net migration has been low for more than a year and the Reserve Bank does not expect it to return to pre-Covid-19 levels, even as border restrictions are eased.

Orr says high levels of building have been rapidly adding to supply, and this is likely to be supported by recent policy changes allowing for more urban development.

“While monetary policy will remain accommodative for some time, interest rates will eventually increase as the need for low interest rates lessens.

“Additionally, recent tax changes proposed by the Government are likely to reduce the prices investors are willing to pay for houses and will cause some to sell.”

The Reserve Bank has also reintroduced loan-to-value restrictions (LVRs) to limit higher-risk lending, particularly to investors.

As the long-run determinants of house price growth wane, behavioural factors that have accentuated house price growth, such as “fear of missing out”, may also diminish, says Orr.