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Tempered residential demand has seen New Zealand’s developers navigate their fair share of challenges in 2023. However, a better balance between supply and demand is forecast as we head to year-end.

Selling conditions are improving across the residential development sector, supported by strengthening economic conditions and more positive consumer sentiment. Yet, while residential developers remain guarded, a new supply squeeze is looming.

Key developments in the last few months have helped to put a floor underneath falling property prices, with easing credit conditions and a surge in migration helping Kiwis to feel more optimistic about the residential outlook.

However, challenges still persist for residential developers bringing new projects to the market, Bayleys National Director of Projects Suzie Wigglesworth says.

“The rapid rise in construction costs over the last 18 months has occurred at the same time housing demand and real values have fallen, making it difficult for development firms to manage their feasibility requirements.

“While the outlook appears brighter for the days ahead, as recent evidence shows an increase in off-the-plan sales activity, project pre-sales remain a sticking point for lenders,” she says.

SUPPLY SQUEEZE

“A year-and-a-half of flat to middling sales activity across all asset classes has hit bank margins hard, and we are seeing renewed appetite from financiers for well-planned projects.

“But even the best-planned projects can still fall at the first hurdle if developers can’t demonstrate buyer demand, with pre-sales remaining a firm pre-requisite to achieving funding requirements.

“In the face of rapidly rising interest rates and market uncertainty, buyers pulled back, and developers pushed pause on project plans, which has seen a significant reduction in the forward-looking supply pipeline,” Wigglesworth says.

In Auckland, for instance, data from Statistics New Zealand shows new building consents dropped 25 percent in March compared with the year prior.

The cost of bringing new projects to fruition remains a critical concern for developers and home builders, with construction prices rising some 13 percent over the last 12 months.

At the same time, record-high migration is running at an annualised rate of more than 2.4 percent population growth – which is five times faster than Government statisticians and infrastructure planners have previously assumed.

Analysis from the Financial Times has found that over the last 30 years, New Zealand has built the fewest new homes for every 1,000 new residents in the English-speaking world. Concurrently, Aotearoa-New Zealand has noted the fastest rise in real residential values and the most expensive rents relative to incomes.

The recipe, Wigglesworth says, is that population growth will outstrip the pace of homebuilding in the year ahead, once again putting acute pressure on our housing supply and, in turn, values across the country.

RENEWED APPETITES

Broadly expected to see the housing market recover from its post-pandemic doldrums faster than expected, supportive factors including high migration, stabilising mortgage lending rates, easing credit conditions and improving buyer sentiment are a buoy for the residential development sector.

“Supportive factors including high migration, stabilising mortgage lending rates, easing credit conditions and improving buyer sentiment are a buoy for the residential development sector.

Bayleys National Director or Projects

Suzie Wigglesworth

“Larger residential developers which have been well-capitalised and are in a good position to manage market volatility are noting an increase in interest amongst buyers.

“While they are reticent to say the market has turned, the broad consensus is that we have passed peak pessimism, and various buyer groups are making greater enquiries.”

Importantly, rental prices are up 3.8 percent year-on-year, a feature anchored by residential landlords anticipating an influx of new residents searching for homes.

“Given the advantages of interest deductibility on new-build properties, renewed market interest amongst investors is expected to be primarily focused here, putting pressure on new supply for the years ahead.

“At the same time, first home buyers are more engaged with the development market. Gone are the days when they could afford to buy a home and finance renovations. Instead, they’re looking to turnkey properties in affordable areas as a source of value.

Wigglesworth says that savvy development firms have been able to adapt to market conditions, with some moulding their products to suit buyer appetites.

Modular housing construction firm TLC has performed well over this period, evidenced by the success of Elevation in Auckland’s Northcote.
Designed to Home Star 6 efficiency, the project, which is close to completion, features two buildings of six levels each. Innovative construction includes the use of ready-made pods which have been shipped to New Zealand from a manufacturer in Vietnam.

Wigglesworth says the development is an excellent example of a Bayleys-marketed project that has created efficiency during the building and construction phase to appeal to buyers, with sales activity and showroom visits increasing over the last six weeks.

SHIFTING GEAR

The factors which have weighed heavily on market demand over the past 18 months are starting to turn, and an easing in credit conditions provides further impetus for buyers to come off the sidelines.

“While the end of the monetary policy tightening cycle is now in sight, migration remains the prevailing news story – strengthened by what we’re seeing across the Tasman,” Wigglesworth says.

“Australia has reported a sharp surge in net migration, with rents rising sharply and house prices increasing three percent over the last few months. This has unwound approximately one-third of the decline in the year to 2023 and encouraged developers to become more active market participants once again.”

Economists at New Zealand’s largest bank, ANZ, estimate that despite New Zealand essentially eroding its housing deficit by the third quarter of 2022, demand for new housing has outstripped supply in the six months to March 2023.

“Affordability remains a critical concern for many buyers, but so too is the ability to secure a home, with many understanding the best time to buy was yesterday.

“New-build and off-the-plan projects continue to provide a host of benefits for residential purchasers with special pricing and incentives to purchase new, including exemption from interest deductibility rules and lower deposit requirements.

“In addition to financial incentives, new properties boast modern features and new technologies, reduced maintenance and statutory guarantees for quality and workmanship which increase the value proposition for buyers in more price-conscious market cycles.”

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