Officials are warning of a housing downturn. Photo / Jason Oxenham
Officials are warning of a housing downturn. Photo / Jason Oxenham
Officials have warned the Government that the overheated construction sector is headed for a “hard landing”, which would see the number of new homes built every year plummet by thousands.
They warned the downturn may only exacerbate the existing housing crisis, pushing up rents and the price of homes atthe very same time as the country heads into a period of Reserve Bank-induced high unemployment. They said construction cost pressures are now so intense that in some regions it is simply no longer profitable to build housing.
The warning comes from the Ministry of Housing and Urban Development’s Briefing to the Incoming Minister (BIM). It was delivered to Housing Minister Chris Bishop last year, but only recently released. Parts of it have been published by BusinessDesk.
As of June 2022, 43 per cent of renting households spent at least 30 per cent of their income on housing, compared with 21 per cent of owner-occupied households.
In 2018, at least 102,000 people were estimated to be living in severe housing deprivation. For Māori, the rate of homelessness was nearly double the national average and for Pacific people, nearly triple the national average.
Nearly one in five people of Pacific heritage live in “severely overcrowded” homes.
The briefing considered whether the slowdown in construction was heading for a soft or hard landing - or whether it was headed for a Global Financial Crisis-style crash.
“Recent indicators and sector feedback suggest the construction sector is heading for a ‘hard landing’, with construction activity dropping around 20 per cent below sector capacity at a national level,” the BIM said.
“Consents could fall to around 32,000 in 2024, below sector capacity of around 38,000 - 40,000 dwellings per annum.
“Although house prices are now rising, pre-sales for new projects remain low and development finance is difficult to attain. It is expected consents and construction activity will continue to fall,” the BIM said.
Alarmingly, the officials warned that in “many regions it is not profitable to build, as the cost of building new homes exceeds the price of existing ones”.
MHUD thinks the construction sector is heading for a "hard landing". Graph / MHUD
“Declining construction activity and investment in land development mean new housing supply could remain low for some time. This has been exacerbated by the recent extreme weather events,” the officials said.
They warned that high immigration, combined with the construction downturn was “already placing pressure on the rental market.
“[T]here will be a period of worsening rental affordability at the same time unemployment is expected to rise.”
It warned that some regions could be particularly hard hit if the “hard landing” in the construction sector was “prolonged.
“For some time, many regions have experienced high levels of housing deprivation and low levels of housing supply relative to their populations. Consents had increased in recent years due to rising prices, but consents are now falling,” the officials warned.
The briefing offered some advice to the Government. The officials urged ministers to continue building houses during the downturn to “maintain the development pipeline”. The officials said that with the Government’s finances under pressure, ministers would have to make “challenging choices about where best to invest”.
They urged ministers to free up more land, and remove barriers in the “land, infrastructure, development and housing markets”.
The officials said that the Government should “require joint regional spatial planning that is robust and has weight in council land-use decision-making and investment, to ensure enough land and infrastructure is available to support housing growth objectives”.
Joint regional spatial planning was a key plank of Labour’s replacement legislation for the Resource Management Act, which the new Government repealed shortly before Christmas.
Officials said national-level directions for development should be strengthened to allow central government to force more land to be unlocked for development.
They said the review of the building consent system, initiated by the previous government, should focus on improving the “speed and consistency” of consenting decisions.
The briefing comes as a warning to the new Government which has talked a big game on housing.
“Labour has catastrophically failed in housing”, Bishop said prior to the election.
His party’s Going for Housing Growth policy promised a “comprehensive programme of work to unlock land in and at the edge of our cities, build infrastructure for more houses, and incentivise communities that go for housing growth”.
So far, the new Government has begun a review of Kainga Ora’s finances, the state housing agency, which could lead to fewer houses being built. The briefing to Bishop warned that funding for public housing had little funding committed “beyond the next year or two.
“Government investment in new housing supply risks falling at the same time construction activity is in decline,” the briefing said.
As part of its coalition agreement with Act, National also agreed to make the Medium-Density Residential Standards optional for councils, a move which will likely mean fewer new houses being built in inner cities. This would appear to be contrary to the officials warning that more houses needed to be built in places where people are concentrated.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
