Housing markets move in cycles and the cyclical rise up until recently has been the biggest all of us have ever seen. Encouraged by low interest rates, the temporary removal of Loan to Value Ratio restrictions, diversion of international travel spending, and a focus on our home environments, the pandemic period has seen average NZ house prices soar.

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Compared with just before the first nationwide lockdown early in 2020 house prices nationwide rose about 39% in Auckland and 44% elsewhere come the end of 2021. Soaring prices naturally have encouraged a surge in new house construction and data from Statistics New Zealand tell us that in the year to March a record number of consents above 50,000 were issued for new dwellings of all types to be built around the country.

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In Auckland consent numbers have risen to a record 21,500 from only 4,000 exactly ten years earlier. This over five-fold increase in Auckland consents can easily be classified as a boom, especially relative to the rest of the country’s change from 13,000 to 29,500.

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The surge in Auckland construction has been underway for a decade and easily precedes the recent extra surge due to the pandemic. It was also underway and growing during the near three-year period from the end of 2016 into late-2019 when Auckland house prices were unchanged. Back then consent numbers went from 10,000 to 15,000 despite flat prices.

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I’ve run through a lot of numbers so far but there’s a reason for that best illustrated by those in the paragraph just above. Residential construction growth in Auckland has not just been driven by rising prices encouraging people to build something from which they might make a capital gain or simply get a high margin selling price.

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Over the decade from 2005 into 2015 house construction was unusually weak in our biggest city. Factors behind this include the blowback from construction of leaky homes between 1994 and 2004, ending of a boom in apartment construction come 2004, and low availability of land and supporting infrastructure to accommodate new dwellings.

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From 2014, just as consent numbers had about risen to average levels, population growth accelerated as far fewer Kiwis left New Zealand permanently, more started coming back, and working visa migrant numbers lifted. The extra population growth placed new pressure in a city already short of sufficient housing stock.

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In fact, we can get insight into the extent of the housing shortage by looking at household occupancy data from census. In 2001 the average number of people per dwelling in Auckland was 2.94. By 2018 the number had risen to 3.15. But in the rest of the country the occupancy rate only went from 2.65 to 2.68.

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To get back to the 2001 ratio Auckland would need an extra 37,000 houses. To get back to the 1991 occupancy rate of 2.87 it would need 49,000 extra houses. Much as consent numbers have surged since 2018, when we allow for population growth of about 4% since then, and not all consents being acted on, a shortage anywhere up to 20,000 may still exist to get back to where things were in 2001.

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Auckland still needs a lot more houses and recognition of this has been a driving force behind the many central and local government rule changes since 2016 aimed at freeing up land and accelerating supporting infrastructure development.

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Some of the new growth in housing is happening on the city’s outskirts and there is plenty of demand for such housing. But a lot remains concentrated in existing residential areas and that is where more money is being directed to upgrade water infrastructure in particular.

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The existing suburbs are also where many people want to reside, especially as fuel costs have recently risen sharply and could easily go higher as a result of the Western world and parts of Asia shutting Russian energy supplies out.

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But it is not just a continuation of the underlying shortage of dwellings in Auckland we need to consider when picking where things are headed from there. As noted at the start of this article, housing markets move in cycles. The cyclical part of Auckland’s price and construction surge since late-2019 has now ended.

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On average Auckland house prices were 4.1% lower in the March quarter of this year compared with the December quarter of 2021. Outside of Auckland the decline has been only 0.6%. Does this mean Auckland will ultimately see greater price falls than the rest of the country as we pull back from unsustainably high price levels of late-2021? Not necessarily.

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Auckland tends to slightly lead price changes in the rest of the country, so there will eventually be some price decline catch-up outside of the city. There are also some special factors in play during the pandemic which have propelled property demand in the regions more than in Auckland, but which will soon if not reverse at least not be present.

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One of these factors is the shift towards working from home around the world which has led some people to sell in large cities and shift to live and work in the regions. Already there is a shift back to the office underway in large offshore economies and eventually this will happen here as well. This may not mean people now shifting back to Auckland after just 18 months ago selling up and leaving. But it will mean the absence of an outward flow as happened during the pandemic.

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Another special factor in play has been an acceleration of retirement plans by many older Aucklanders. Many who were planning to sell up and leave this year and over the next 2-3 years have already done so. They have acknowledged the illness risk from covid and embraced a desire to retire earlier than planned, assisted by strong price gains on their Auckland home and perhaps other investments as well.

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But for the next 2-3 years this means flows of people retiring to the regions are likely to be smaller than would otherwise have been the case without the pandemic.

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Another dynamic in play which will support demand for Auckland housing more than elsewhere in the near future is the granting of a special residency visa to 165,000+ migrants. As non-residents these people on working visas have not been able to purchase a property. When granted residency they will legally be able to.

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Not all will be in a position to make an immediate purchase. But some will and because more such migrants are in Auckland than elsewhere, this will be a special source of support for Auckland’s housing market in the next 1-3 years.

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Another interesting phenomenon at the moment is that Auckland house prices are below their long-term trend relationship with the rest of the country. That compares with late-2016 when they were well above trend and helps explain why during the three year period from 2016-19 when Auckland house prices were unchanged, they rose on average by 25% elsewhere in New Zealand.

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Auckland is not due for a price correction downward against the rest of the country. Instead, it is due for a price recovery. Taking these special factors into account does not change the fact that for Auckland as for the rest of the country (except maybe Queenstown), the factors of greatest importance to house price changes over the cycle are largely facing downward.

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Interest rates have risen about 2% and further rises of 0.5% - 1.0% look likely as central banks around the world remove pandemic stimulus and act to prevent the current unusual surge in inflation from becoming entrenched into wage and business selling price decisions.

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Net migration outflows from New Zealand are likely over the next 2-3 years as many Kiwis shift to Australia for work, a lower cost of living, and lower rents and house prices.

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FOMO – fear of missing out – has disappeared in all NZ regions and a buyer’s market exists everywhere. Buyers generally can see that they now hold more of the negotiating power and that is causing fewer properties to sell, time on the market to lengthen, and prices to correct lower from unusual pandemic highs.

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But will prices fall precipitously? No. Unlike previous periods of weakness in the NZ economy the labour market is very tight. Job security counts for a lot when it comes to willingness to take on a mortgage and to continue servicing one already in place.

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Rents are also rising strongly as rental stock remains short around the country. This means that as renters see their weekly accommodation costs rising strongly at the same time as other costs are escalating, thoughts will naturally turn to the question of whether it would be better to purchase a property. For many the answer will be yes, even though there will be some hesitancy to purchase immediately because prices are correcting away from pandemic highs.

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There is also a strong ongoing shortage of social housing in New Zealand which will keep at least one property buyer very active in the market – Kainga Ora. Plus, whatever the overall house numbers versus population may be (the occupancy rate), since the mid-1990s not enough entry-level houses have been built.

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Onto these factors we need to add still rising construction costs. The energy price boom related to Russia’s invasion of Ukraine is adding costs to most building material products given the use of energy to make that. More than that, commodity prices generally have been strongly boosted by supply chain disruptions.

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Such disruptions for manufactured goods produced in China are worsening even more as China continues to pursue a zero-Covid strategy which is leading to widespread closures of factories, ports, and entire cities.

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After rising 14% in the past year, construction costs could easily rise by the same amount again in the coming year. This will tend to underpin the prices of all dwellings, including those already built and of course those which need replacing or upgrading.

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All up, despite average house prices correcting downward from unsustainably high levels, the fundamental shortage of property in Auckland continues. At some stage prices will generally flatten out, probably before the middle of 2023 assisted by far fewer worries about interest rates rising further. But history tells us some important things when it comes to picking what house prices are going to do.

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First, the forecasts are usually wrong, especially predictions of price decline. Second, when it is clear prices are no longer falling there emerges a period of catch-up demand from those people who have held off buying, waiting for lower prices. The problem with this strategy is that it focusses too much on immediate minimisation of expense and not enough on two important things.

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One is that prices trend upwards over time, very few people ever buy then sell within a short period, and there are very few people who regret purchasing too early at any stage over the past half a century. The other important consideration is that what really matters more than saving 5% on price is purchasing a property which offers the key attributes one is seeking such as location to amenities, transport links, facilities, fitout, and maintenance level.

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For the many tens of thousands of people considering making a property purchase in the current market where prices for existing properties are generally easing, a focus on attributes rather than picking the cycle bottom would seem a better strategy from a long-term perspective.

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The views and opinions expressed in the report are solely those of the individuals involved. The information herein should not be considered investment advice and should not be used without first assessing your own personal financial situation.