What’s driving NZ property prices?
Suburb neighborhood in New Zealand
New Zealand's property market has been on a sustained upward trajectory for many decades, recording double-digit gains per year, for many years consecutively, at several phases of its property cycle.
What is fueling this incredible performance, and more importantly, what are the chances this will continue? In this article today, we will take some time to better understand the driving forces behind the property boom and the factors that will continue to drive future trends.
In its simplest form, asset prices are driven by the dynamics of supply and demand. These factors have tipped the country into a housing crisis with government racing to implement plans and policies into the next decades to solve the problem. We will delve deeper into the insights for the factors that drive demand and issues affecting supply. Understanding the dynamics allows property investors to spot opportunities and have the confidence to stay the course through the cycles.
Where is all the demand coming from?
Consistently strong organic population growth, high net migration, the changing trend of family dynamics breaking up into smaller households, these are the driving forces behind a fast-growing housing demand that put immense pressure on New Zealand housing market over the decades. Homeownership continues to be part of the Kiwi's dream, fueling demand for residential properties across the country.
Strong organic population growth
New Zealand's population has been growing steadily over the past decades, partly driven by natural increase. This growth has a direct impact on the future demand for housing, as increasingly more people require places to live. The natural increase in births from 10-20 years ago, are the pool of first time home buyers entering the market today. Similarly, the strong natural increase in births today creates a ready pool of future home buyers and an inherent support & driver to the housing market. Additionally, higher populations lead to greater economic activity within the country which further supports positive property price trends.
Despite many countries experiencing declining organic populations, New Zealand's organic population growth remains at the forefront and is expected to continue in the future. For the sake of this article, we will take a look at how New Zealand's organic population growth, fares against other popular investment destinations for Singaporeans, including only OECD nations.
New Zealand has consistently attracted talents all over the world to settle here
2. High net migration
Net migration is another significant factor in New Zealand's population growth. The country is a popular destination for people from all over the world, with net migration adding an average of 43,000 people to the population every year since 2014. Singaporeans are among those who have made the move, with many attracted by the country's high quality of life, safety, and strong education system. It is also worthwhile to note that New Zealand has been consistently ranked as the top 3 most peaceful & safest countries in the world by the Global Peace Index, further adding to its appeal as a desirable place to live or invest in. New Zealand's university education has also attracted international students from Asia and other parts of the world, many of whom remain in New Zealand after completing their studies. From ultra-high net worth individuals to skilled professionals, many have called New Zealand as their new home.
Source: stats.govt.nz
Post covid days, net migration has once again surged after a pro-longed period of closed borders. The overall high net migration has contributed significantly to the demand for housing, particularly in major urban centers such as Auckland and Wellington & Christchurch. This trend is expected to continue, as New Zealand continues to be a strong magnet and one of the top destinations for people seeking a lifestyle not available elsewhere. For the investors, this presents a favorable investment environment for those looking to deploy funds into the New Zealand property market.
Typical Kiwi family
3. Changing trends in Family dynamics
Changes in family dynamics do not necessarily contribute to population growth directly in New Zealand, however, they add pressure to the demand for more housing options. With more families nuclei breaking up into separate households due to children transiting into adulthood, and an increasing number of young adults moving away from home to study, work or even start a family of their own, demand for housing has leapfrog as more people require their accommodation. For ease of understanding, a family home that used to house 2 adult parents and 2 children, will now require 2 additional housing stocks to accommodate the young adult as they seek out a life on their own. While not all young adult will necessarily make the same move and has the same requirement, it is a pretty rampant trend in the New Zealand context. Unlike here in Singapore, where most young adults may stay with their parents into their late twenties or early thirties until their next transition, such moves take place much earlier down in New Zealand. This shift in family dynamics has created a growing demand for housing options in New Zealand, as more young adults move out of their family homes earlier and require their own living spaces.
The pool of young working adults is relatively large and are drawn to major cities when there are better employment and lifestyle prospects. Investors can take advantage of this trend by investing in the New Zealand property market to meet the rising demand for housing.
Overall, New Zealand's population is set to continue to grow in the coming years, driven by a combination of factors such as high net migration, changing family dynamics, and natural population growth. Investors who are looking to tap into this growing market should consider investing in the New Zealand property market as the demand for housing is expected to remain high in the foreseeable future. Based on Stats NZ, New Zealand's population is projected (with a 90% chance) to increase from 5.1 million in 2020 to a higher limit of around 6 million by the year 2030. The expected strong growth in population will undeniably fuel stronger demand for housing in an already tight supply market, within this decade. In the longer term, New Zealand's population is expected to cross 8 million people by mid-2050, on the count of higher fertility and net migration rates. The long-term steady rise in demand for housing, coupled with the shortage of housing supply, presents a compelling investment opportunity for both local and foreign investors alike in New Zealand's property market.
Where is all the supply?
With a fast-growing population and an insatiable demand for home ownership and rental properties, the housing supply in New Zealand has struggled to keep up. So much so that it has now become a widely recognized housing crisis nationwide, with several attempts to improve the long-term problem, including banning all foreigners from buying residential property in New Zealand, except Singaporeans and Australians. For Singaporean investor, this represents a unique opportunity to invest in a market where supply is limited and demand is steadily increasing, which can lead to favorable price appreciation over time.
So, where's all the housing supply? One could easily argue that since there is such an immense need for housing, why not just build more homes? The answer to that question is multifaceted, with a combination of factors contributing to the shortage of housing supply in New Zealand.
Developmental Land Supply Shortages
Contrary to popular belief, developmental land shortages are a major issue in New Zealand, with over 80% of the landmass unsuitable for residential development. If you have traveled to New Zealand or watched videos, you would probably have seen vast areas of land and thought to yourself: "How can New Zealand be short on Land?" While New Zealand may have a large land mass, the majority of it is mountainous, covered in forests or national parks, or used for agriculture. The limited availability of land suitable for residential development is primarily due to geographical and environmental factors such as mountains, hills, lakes, and rivers. Moreover, 87 percent of the population lives in towns and cities, further straining the land use within urban spaces. Projections also have it that about 80 percent of population growth for 2018–43 is expected to be in the main urban centres. In other words, what's lacking is, developmental land to build in order to house the growing population that powers the economy. Additionally, stringent regulations around land use and zoning further limit the availability of lands for developments, hampering the creation of new housing supply. Here are some interesting facts about land use in New Zealand:
Did you know that approximately 40% of New Zealand's total land is conservation land with restricted development rights?
About half of the total land area in New Zealand is used for agriculture, forestry, and housing: land cover exotic grassland 40%, exotic forestry 8%, cropping & horticulture 2%, urban 1%, native land cover 49%. (Note: These percentages exclude lakes and rivers.)
Source: https://www.stats.govt.nz/news/new-report-shows-impact-of-demands-on-land-in-new-zealand/
2. Government Regulation
Another significant factor potentially contributing to the housing shortage in New Zealand is government regulations. New Zealand has several regulatory requirements for building and developing homes, which can lead to higher costs, delays in construction and lengthy approvals processes. These regulatory requirements add to the complexity of obtaining necessary building consent, which can further exacerbate housing shortages. Furthermore, the Resource Management Act (RMA) is known to increase the time and cost required for obtaining necessary approvals due to a lengthy application process. As a result, the New Zealand government has implemented several measures to address these challenges, including creating special housing areas that streamline planning and consenting processes, offering support and funding for building developments and reforming the RMA to make it easier to navigate. However, these are process works and would require many years of patience and policy implementation to significantly boost the supply of housing in New Zealand. Despite this, the regulatory environment in New Zealand still has a significant impact on the housing market, and there is a growing call for further reform to create a more efficient and streamlined system.
Kiwibuild is a New Zealand public housing initiative to bridge the gap in the national housing crisis but faces an uphill task
3. Public housing?
Unlike around 80% of Singaporeans who has access to affordable public housing, HDB here on our tiny island, public housing in New Zealand is not as prevalent. It is estimated that only around 4.5% of the population live in state-owned or community housing, which has resulted in a high demand for private developments. Kiwibuilds are a public housing initiative by the New Zealand government to address the housing shortage, which involves building affordable homes and creating communities. However, while this program is a step in the right direction, it may not be enough to meet increasing demand and address affordability concerns long-term. Ever since its inception in 2018, KiwiBuild has had its fair share of controversies and setbacks. These includes poor uptake by buyers, difficulty in finding suitable land for development, and construction quality issues. The supply rate so far has fallen far short of the initial targets, indicating that significant work still needs to be done to increase public housing options in New Zealand. With an initial target of 100,000 affordable homes in 10 years, KiwiBuild's slow progress has led to criticism and calls for a comprehensive review of the program. At its halfway mark since it started, kiwibuild have only achieved approximately 1300 homes so far, way falling short of the original target (at point of writing in 2023). Having achieved just less than 2% of its goal after 5 years since it started, the road ahead does looks challenging in many aspects.
For a long time before and into the future, the kiwi dream of home ownership continues to primarily rest on the shoulders of private developers. By now, I am thinking to myself, if the government is already facing an uphill task in increasing the housing supply, how much steeper is the task for private developers?
Where are all the developers?
The demand for housing in New Zealand has attracted a considerable number of private developers, who are responsible for creating the majority of new housing stock. In addition to the same challenges mentioned above in building housing supplies, private developers have to balance the risk of investing in new projects for new sales with the uncertainty of the housing market and government regulations. The complex process of obtaining permits and meeting regulatory requirements can cause delays and increase the cost of development, which in turn can impact affordability for sale to homeowners. The availability of credit for developers, interest rates and market conditions are also external factors that can affect the viability of development projects. As much as the long-term demand for houses remains high, developers often tread with care and operate within a safe zone to ensure longevity in the business. They need to moderate supply on their end based on sales demand that could turn a profit. Despite the high demand for new housing, developers need to balance the cost of construction and land sales cost with the eventual sales price of the property. This means that in some cases, developers may choose to delay or cancel projects if they determine that the market conditions are not favorable for a profitable sale. This greatly impacts the pace at which new housing stock can be delivered to the market and may contribute to the current shortage of affordable homes in New Zealand. Even the largest developers in many key cities are only able to deliver a small percentage of the required supply relative to the soaring demand.
The constant imbalance of the housing demand from home buyers & investors against the slow supply has been driving huge price growth over the years, netting investors and homeowners massive equity gains and profits.
Source: stats.govt.nz
Problems with existing housing stock
To add woes to the housing shortage, there are also problems with the existing housing stock in New Zealand. The government calls it leaky homes, not in the literal sense but refers to homes that fall short of standards that make the place less habitual. Many homes in the country are old and poorly insulated, leading to issues with heating and energy efficiency. Many discerning home buyers will opt for modern living, spaces that offer a comfortable living of a reasonable standard. These issues can lead to a decrease in demand for older properties, while newer and more energy-efficient homes are sought after.
In response to the country's housing shortage and concerns about the quality of existing housing stock, the government has introduced a range of measures to encourage the development of new, high-quality housing.
One of the most significant of these measures is the introduction of the Healthy Homes Standards, which require rental properties to meet certain standards around heating, insulation, ventilation, moisture, and draught stopping. This has led to a significant increase in demand for new, high-quality rental properties that meet these standards.
Construction cost such as materials and manpower has been on a strong upward trend
Construction costs
Rising construction costs are also a major driving property prices in New Zealand. The cost of building materials has increased significantly over the past few years, with shortages of key materials such as timber, steel, and concrete leading to price increases. According to Stats NZ, in 2022, residential construction costs increased 13%. The need to build houses that is compliant with the new Healthy home standards (that increasingly sets new bar) also meant that more goes into the construction cost. This, combined with the shortage of available construction manpower, has made it more expensive to build new homes. On the same note, developers caught out on spiraling cost control will find themselves holding back or delaying on new projects, further contributing to the shortage of housing supplies.
Opportunities abound
Overall, the combination of a growing population, slow supply of new housing developments, rising construction costs and existing quality issues with older homes is contributing to high property prices in New Zealand. Addressing these challenges will require a coordinated effort from the government, developers, and builders to increase the supply of new housing developments while improving the quality of existing housing stock. With the gap between demand and supply still playing catch up, it will be some time before it can come to an equilibrium. As the market goes thru different cycles and shifts, opportunities abound for investors to ride on the trend of future upside.
What’s the best way to find out more? How can I get started?
If you are reading this, you are probably keen to explore and get started on the investment journey in the New Zealand property market.
Perhaps you are unfamiliar with New Zealand or perhaps you already owned property there and looking to scale? Will New Zealand market be a right fit for you and your family? Is this a good time to buy an overseas property, or should you wait and see?
Well, everyone’s situation is different. There is no one size fits all advice. What has worked for someone, may not necessarily work for you.
At Brickzwealth New Zealand, our aim is to bring clarity to your investment decisions with extensive on the ground experience for the overseas market.
Whether you are a first time property investor or a seasoned buyer with a portfolio, we are here to provide an honest and objective view to your investment journey.
We can help you by:
1) Providing Strategic property advice that best fit the outcome you desire
2) Identify & spot investment opportunities that align with your goals
3) Providing access to value-able partners in your investment journey with us
Besides the resources available on this website, the best way to get started is to kick-start a conversation with us today.
Invest differently. Inspire your future.
Ryan Quah
Founder
Brickzwealth New Zealand
