Greater intensification in the country’s main cities has prompted a huge increase in demand for townhouses and they are now the dominant housing type being built across Auckland.

As the quarter-acre dream slips away for many people, more buyers are open to living in townhouses on tiny sections to be near main centres.

Townhouse developments, both big and small in scale, are popping up everywhere to satisfy growing demand. They are defined as a dwelling, generally having two or more levels, and attached to other similar units via shared walls.

Statistics New Zealand’s latest building consent figures show the trend towards townhouse developments is all encompassing across the country. Over the year to March, 25,475 multi-unit homes were consented, overtaking the 25,383 stand-alone houses that were consented.

More than 43 per cent were consented in Auckland, mainly because the 2016 Unitary Plan allowed for higher density and heights in residential areas, which has resulted in hundreds of townhouse developments to cope with the city’s growth.

According to Auckland Council figures, about two-thirds of all new building consents are for higher-density housing, such as townhouses.

Market Share

Analysis of the townhouse market by Valocity researchers Wayne Shum and James Wilson shows freestanding houses were still the dominant housing type consented between 2016 and 2019.

However, rising land costs encouraged intensification, and in 2020 the number of consented townhouses overtook freestanding houses. This trend accelerated and the number of freestanding homes consented dropped to 5,697 this year, down from a peak of 6,835 in 2019.

Investors hold nearly a quarter of the townhouse market, with a heavy concentration in brownfield redevelopments. Within these locations, townhouses tend to be constructed on a smaller, project-by-project basis. The townhouses also tend to be smaller than those in greenfield developments, such as Hobsonville.

Not A Pretty Sight

Residents around the country are seeing townhouse intensification with their own eyes and in many cases straight over their fence. For some the reality is confronting.

‘They tend to be in good locations, close to transport links and amenities. A lot less maintenance is required and they are easy to rent’ Pete Evans

Last year, one of the oldest and most expensive houses in Wellington, with six bedrooms, four bathrooms, a pool, tennis court and panoramic views over the city, sold for $6.5 million. By the end of the year it had been bowled for a development of 11 two-storey townhouses to the consternation of Nimbys (not in my back yard) and Yimbys (yes in my backyard). The Nimby neighbours did not like it and complained of parking and noise, while the Yimbys wondered if more houses could have been crammed onto the 1598m2 site.

Sick of the arguments, or worried developers are going to build three-storey townhouses next door, some property owners across the country have fled to quieter parts of the country.

However, many property sellers with land zoned for townhouses and apartments are taking advantage of the trend and are banding together and selling their houses in lots to developers and making a handsome profit at the same time.

Three neighbouring west Auckland properties were recently auctioned off together for just under $6 million – each property owner pocketing almost $2 million. Other sellers are doing the same and classic stand-alone homes are being bowled for townhouses.

More Intensification

Also coming is further intensification via the landmark collaboration between the Labour government and National opposition to allow three houses of three storeys each without the need for resource consent to be built on most sections across the country’s major cities.

Councils need to have plans in place by August to follow the prescriptive Resource Management (Enabling Housing Supply and Other Matters) Amendment Bill, which enables greater building heights and density across cities, including in and around city and metropolitan centres and rapid transit stops.

The bill’s intent has been welcomed by developers and many other experts. One expert says while 20 per cent of the developments might be “sh*t”, the rest will actually free homeowners, builders and developers from a lot of red tape.

Others in Auckland have been critical of the government’s bill as the 2016 Unitary Plan, years in the making, has already removed much of the city’s height and density rules allowing 900,000 houses within residential areas and more when the city centre and other metropolitan centres are included. That’s almost twice the number of Auckland’s residential homes and enough for the next 30 years.

Helping to boost townhouse intensification is a new $1.4 billion government-funded infrastructure package for up to 27,000 new homes over the next five to 16 years in the suburbs of Māngere, Mt Roskill, Northcote, Oranga and Tāmaki.

Housing minister Megan Woods says infrastructure capacity for up to 16,000 new homes will be created on Crownowned land, while capacity for around 11,000 new homes will be created on surrounding privately owned land.

Community Lift

Colliers International residential projects national director Pete Evans says there will not necessarily be a great surge of townhouses when the new legislation comes into force.

“Even though infill housing can often give the community a lift when well-designed townhouses are replacing old, dilapidated homes, market conditions, financial constraints and developers now able to cherry pick development sites rather than just buying anything available, will keep the market steady.”

With the housing market dropping and building costs going up, some developers admit that right now is not a good time to be in the market. Some building products need to be ordered 18 months in advance, banks are reluctant to loan meaning second-tier lenders are the only other option, making development perilous. Buyers are also nervous.

However, townhouses have attractive features for investors, says Evans. “They tend to be in good locations, close to transport links and amenities. A lot less maintenance is required and they are easy to rent.”

The buyer pool for townhouses increased rapidly when the government announced changes last year scrapping existing rental home owners ability to claim mortgage interest costs as an expense against rental income and extending the bright-line test to 10 years, but exempting new builds from these rules.

Evans says brownfield developments are more desirable from a buyer’s point of view as transport and amenities, such as cafes, bars, restaurants, shops, schools and doctors’ rooms are usually nearby.

Brownfield developments can rejuvenate sites with old rundown houses that have had no maintenance for years, says Evans. He says greenfield developments have been less popular and are usually for buyers who cannot afford a stand-alone house. Although many are close to regional centres, transport costs can become an issue. “The finished cost of townhouses with carparks is about 50 per cent cheaper per square metre than apartment buildings, but developers have to give away more land than they do with apartment projects.”

Evans says while some investors believe they can do a townhouse development themselves it is usually pie-in-the-sky thinking. “A project needs an experienced developer and builder who are financially sound to make it successful, finished on time and within budget. “As an example, a typical $1 million property bought for a townhouse development will have no income for 12 months or more until the project starts. Developers need to be well financed to cover expenses such as council consents, builders costs, the construction timeframe, progress payments and then cost of selling the properties, while there is little to no income.”

Off-The-Plan

It is common for these developments to be sold off-the-plan, but there are risks, particularly as building costs are rising rapidly, getting building materials can take months instead of weeks and labour is thin on the ground. It can end in completion dates being pushed out beyond a year.

In this scenario banks become twitchy, says mortgage adviser Kris Pedersen. “Banks will lend if a townhouse is completed within 12 months, but outside that timeframe it is difficult to get finance.”

He says buyers can be trapped. It takes time to get a mortgage and if a build goes beyond the expected completion date a buyer can’t settle.

Banks are also demanding a valuation at a new build’s completion, says Pedersen.

“If a buyer signed up at the inflated prices of a year ago, has only a small deposit invested in the build and the market is now pulling back, they might find themselves in trouble.”

The last time this situation arose was during the global financial crisis when prices fell and 90-95 per cent of new build townhouse deals fell over.

“This stage of the cycle has developed quickly, from October of last year,” says Pedersen.

The latest REINZ figures show the housing market downturn intensifying in April. The House Price Index fell another one per cent in the month, while annual house price growth dropped to 6.3 per cent, down from just more than 30 per cent eight months ago. And the median house price of $875,000 is down $50,000 from its peak in November.

It all spells trouble for Pedersen. “We are coming up to a time when a lot of developers and builders will fall over, particularly those with smaller businesses. Many have gone through the consenting process to only find they can’t get finance for their new projects. It is far more difficult to source than just six months ago and right now a big chunk of developments will not go ahead.

“That is not to say a lot of people haven’t done well buying off-the-plan depending on property cycles,” says Pedersen. “Investors who signed up for a new townhouse two years ago have done fantastically well as they reaped staggering capital gains while their property was built on time and they weren’t making mortgage payments.”

He says townhouses have been a good option for investors. About 95 per cent of Pedersen’s clients are investors and they started looking at townhouses last year when the government decided to “close a tax loophole” and introduce new rules, but allow the existing rules to stand for new builds, including townhouses.

“When the tax changes were announced clients either looked at how they could develop their existing properties by subdividing and putting a couple of townhouses on the section or buy properties with that potential. Those looking for more passive income are opting for new townhouses.”

Pedersen says about 15 per cent of his clients’ activity is in the existing housing space, while 70 per cent of activity is in new builds where passive income is a big factor.

He doesn’t necessarily think the new intensification rules coming will help housing stock in places like Auckland.

“The Unitary Plan has provided plenty of room for more houses to be built at greater heights and density without changing the character of the older suburbs.”

Under the new rules many people believe a lot of character will be destroyed across the country and Pedersen expects a huge fight back against it to preserve what little is left while intensification of other suburbs carries on.