BNZ chief economist Mike Jones, in his latest Eco-Pulse, says supply is a key factor in the turning of the housing market and the recent surge in rents.

“If it’s become clearer that we’re falling short, the natural next question to ask is ‘where?’ After all, we know the rates of home building and population growth vary up and down the country.”

Jones has run the numbers for the regions to get a sense of where the under-build might be felt most. And there are a few health warnings that go along with it.

He says estimates of housing demand vs. supply get bandied about a lot, but the underlying data and assumptions mean the margins of error can be huge.

“In our view, the most we can get out of this analysis is a steer on the direction of travel and the high-level regional disparities within that.”

With those caveats he says starting at national level, the country will need an extra 45,000-50,000 residential dwellings this year to accommodate the record population growth. That’s based on an average of 2.6 people per dwelling. Assuming a higher consent non-completion rate over 2021-2023 reflecting capacity constraints within the construction sector, it’s highly unlikely these sorts of numbers will be delivered.

The building scene

Based on trends in building consents, the usual (6-12 month) lag from consent to building work completion, and separate Stats NZ data indicating about nine per cent of lodged consents either don’t get acted on or are to replace existing (demolished/depreciated) dwellings, no more than about 35,000 houses might actually get built, Jones says.

Those are BNZ’s estimates for this year to June. Current weakness in consent issuance, he says, points to additional falls after that.

Performing a similar exercise to the above for each of the main regions breaks down how this shortfall might be spread around the country. Jones estimates Auckland will make up the largest chunk of the absolute shortfall, unsurprising given its large population.

A better way to get a read on relative housing pressures is to express the supply/demand balance as a share of individual regions’ populations. From this, the biggest proportionate shortfalls this year are likely to be in the Bay of Plenty, Otago, Waikato, Auckland and Southland. Gisborne and Northland too to a reduced extent.

Most other regions are close enough to an even balance. Canterbury is included in this bracket even though it technically squeaks into net surplus territory. Such are the uncertainties of the estimation methods involved.

Jones says while the estimates and forecasts are all for the June year, just one year can’t be looked at in isolation. There are always catch-ups and corrections going on from year to year.

Looking at a cumulative position is needed to provide context. “This is where it can get even trickier as we need to make a call on where to start cumulating from,” he says. “Our view is a base of 2006 provides the ‘least wrong’ starting point. It’s well understood that we underbuilt from 2015 to 2020, with the resultant dwelling shortage later mostly corrected following the border closure and associated stalling of population growth through the pandemic years.”

Jones says abstracting from the exact numbers, the important context is that the expected under-build this year is coming from a position closer to broad balance than, for example, the pre-existing shortages of 2015-2020. “In other words, we’re going the wrong way directionally, but the starting point is not as unbalanced as it once was.”

Central North Island regions

On BNZ’s numbers, South Island regions – Otago, Southland, the top of the South, and Canterbury are all in dwelling demand/supply positions near balance or even an excess of supply in Canterbury’s case. The latter reflects more than a decade of strong residential construction activity.

In contrast, there’s clearly a belt through the middle and eastern parts of the North Island in which dwelling construction has not kept pace with population growth. This includes Waikato, Bay of Plenty, Gisborne, and the Hawke’s Bay. Northland is also short.

There’s a couple of extra things worth pointing out here, Jones says. “First, over the past 10 years, the Bay of Plenty and Waikato have consistently recorded the fastest population growth in the country. Second, rental vacancy rates in all of these central North Island regions are amongst the lowest in the country (i.e. there are few available rental listings relative to total tenancies).

“This supports the premise that these regions are afflicted with tighter than average housing markets,” he says. Some of the recent destructive weather events will not have helped.

Finally, Auckland, perhaps surprisingly, doesn’t stand out one way or the other, Jones says. Despite enjoying stronger than average population growth, the region has built relatively strongly for a sustained period. That’s something that, along with Canterbury, is a key point of difference.