Falling house prices may cause a more significant decline in the construction industry, warns a leading bank economist.

ANZ Bank chief economist Sharon Zollner says while household consumption may escape relatively unscathed from a moderate decline in house prices, it’s a different story for the construction industry.

Even if house prices simply grow at a slower rate, rather than falling as in the central and low scenarios, consents would be expected to slow significantly over the next few years. “That’s not too surprising — building consents have been setting back-to-back records in recent months, so some moderation is expected — not least due to the extreme labour and materials shortage constraints weighing on activity in the industry.”

ANZ’s modelling shows the slowdown in new building consents is likely to be considerably faster if house prices are also declining rapidly. Construction has been a key driver of economic momentum over the course of the pandemic — and even in the year to November, the 8.6% year-on-year rise in construction jobs was the biggest of any industry. A larger contraction in construction activity could act as a significant drag on overall economic momentum, says Zollner.

By the bank’s estimates, the closed border alongside gangbuster construction activity means New Zealand’s housing deficit is closing to the tune of about 6,000 houses per quarter.

Housing Shortage

Supply continuing to outstrip new demand limits the likelihood that house prices will get wind in their sails again any time soon. “While there is still plenty of work to do before supply and demand are in balance once more (ANZ estimates a housing shortfall of about 60,000 houses), a severe contraction in house prices and sentiment could certainly put the brakes on construction activity, but there is not much evidence of that at the moment.

“In other words, unless the government really ups its house-building game during the next construction cycle downturn, we’re doubtful the country will end up with a sustained housing surplus.”

Zollner says it’s worth remembering the economy is more than just the housing market and construction industry, with residential investment making up less than 10% of the economy. “With jobs growth and labour shortages widespread across many industries, it’s not clear a softening in the housing market will actually take the rest of the economy with it.”

Labour shortages are widespread across most industries — primary industries in particular. “So if a slowdown in construction did cause job losses, they would most likely be short-lived as firms desperate for staff snap up anyone that lost their job,” she says.