Politicians, pundits and the media repeatedly claim that house building in Auckland is booming, that construction is at the fastest rate ever and that the building boom is so big it has reached resource limits for skilled labour and materials. The reality doesn’t match these claims.

Auckland built more houses 13–15 years ago and house building is not predicted to exceed the last building boom until 2019.

Auckland may not even reach the predicted peak boom of 13,000+ consented houses in 2020, as there is a pattern of downgrading predictions.

From Radio New Zealand article titled -Govt slashes forecast for new home building in Auckland -7th Aug 2017

Canterbury after being hit by a series of earthquakes in 2010 and 2011, did have a genuine housing boom, the labour force expanded to meet demand. People retrained, tradesmen were attracted to the region, businesses invested in more productive house building techniques, for example the Concision factory, capable of building up to 1000 prefabricated houses a year.

Source: NZ Herald article -Despite huge housing shortfall, Auckland consents per capita only middling

Canterbury’s housing boom on a per capita basis is almost twice the size of Auckland’s and match’s New Zealand’s record building rates of the early 1970’s.

Auckland’s per capita build rate of about 6 per 1000 residents, has only returned to about average for New Zealand’s building rate in the last 30 years and is significantly less than what the country was building in the 50’s, 60’s and 70’s, as several business journalists and economists have recently commented on;

There is one metric where New Zealand’s construction activity counts as a building boom and that is in its monetary value.

Alongside increasing figures for construction expenditure in the last 4 years, have been house price increases in Auckland, especially for first home buyers.

Greg Ninness of Interest.co.nz recorded that for the bottom end of the housing market -lower quartile prices had risen from $385,000 to $649,000, an increase of 68.6%, for the period July 2013 to July 2017. While for the same period, the combined median take home pay for couples aged 25–29 has increased from $1500.65 a week to $1610.14, an increase of only 7.23%.

What event triggered Auckland’s large increase in house prices?

One obvious explanation is population growth. In recent years, New Zealand has experienced its largest annual increase in population and on a percentage basis the highest since 1974 and before that the peak of the baby boomer years of the 1950s and 60s.

Source -Mieke Welvaert of Infometrics

Fuelled by strong net migration New Zealand’s population over the past five years has surged by nearly 390,000, which is more than the population of Christchurch city, Statistics New Zealand said. In the year to June alone the population grew by 100,400, the biggest ever increase for a June year, lifting New Zealand’s estimated resident population to 4.79 million.

Auckland gets the largest share of population growth and is growing by about 50,000 people per year, which means up to 800 extra cars a week are joining the roading network in Auckland. The city is booming, there are more people, it is busier, there is a lot of money being spent on construction, but Auckland is not having a housing boom.

Auckland is having its biggest population boom why isn’t it having its biggest housing boom?

Economists usually assume when there is a large increase in demand and prices are rising, that the market responds by increasing supply. Economists further assume if the supply response is slow this is evidence that supply is inelastic.

For Auckland’s housing market the increase in demand is New Zealand’s population boom and the evidence of inelastic supply is the moderate increase in house building compared to the large increase in house prices.

Inelastic supply defined here

So that explains the large house price rises in the last four years. But since March, Auckland house prices have dropped back by 4 to 5%. The increased house build numbers is possibly one factor cooling the market. But given this is modest compared to the large increase in population and economists have estimated that Auckland needs to build 13,000 houses a year just to keep up with population growth, there is likely to be other explanations. Such as, the reduction in demand from recent mortgage interest rate rises, the increase in loan to value restrictions on property investors last year, uncertainty from the upcoming election (a similar effect happened before the 2014 election) and possibly the Chinese government tightening capital controls on Chinese nationals preventing them from investing in New Zealand.

My best guess is that tightening credit conditions and property investors taking a breather is currently having the most effect on the housing market. David Hargreaves on Interest.co.nz has written about the change in borrowing patterns based on the latest Reserve Bank figures for July 2017 compared to July 2016, when the 40% deposit rule for property investors was announced by the RBNZ.

These figures show a few more first home buyers are borrowing to enter the housing market, but not many, less than 40 extra on a monthly basis. The extra borrowing of first home buyers at $10million is only 1% of the massive $1033million reduction in borrowing from property investors.

What does inelastic supply tell us about Auckland’s housing market?

Firstly, it is not an exact predictor of house prices. The housing market is complicated, there are many demand and supply influences. It would be foolish to use only supply characteristics to predict market outcomes.

Having made that qualification, all other things being equal, if Auckland is exposed to further demand shocks, then given inelastic supply, house prices will rise.

Reforming Auckland’s inelastic housing supply in my opinion would be one of the best responses to addressing rising wealth inequality, excessive property capital gains and the destructive social outcomes resulting from the housing crisis.

If Auckland does not reform its inelastic housing supply it can expect to have, over the long term, a boom/bust house price pattern, similar to what London has experienced. During price busts, house building rates will also bottom out, like Auckland experienced from 2008 to 2011. With each crash in house building, productivity and innovation in the construction industry, which already has a poor productivity record, will be set back even further.

Can Auckland improve its elasticity of housing supply?

A report commissioned by the Finance Minister -Steven Joyce called -Quantifying the impact of land use regulation: Evidence from New Zealand -July 2017, indicates there is room for improvement.

The report used Edward Glaeser’s (an economist and author of Triumph of the City) techniques to show that the cost of new housing in many urban areas of New Zealand, has deviated above its marginal cost due to land use restrictions.

The report discusses the goal being to transition from tight-supply cities to flex-supply cities. In other words to go from inelastic to elastic housing supply.

Land use restrictions are not just zoning rules and natural barriers which prevent the outward expansion of an urban area, they are also restrictions, such as, height, setback, shade planes, heritage, view shafts, minimum car parking requirements etc, which limit the intensification of existing urban areas.

The following graph indicates the impact of land use regulations on various urban areas of New Zealand. Auckland is the most affected and Christchurch is less affected, this being the probable explanation for why Canterbury had a bigger housing boom than Auckland.

In conclusion

New Zealand needs to take a clearer look at Auckland’s housing market to solve the housing crisis. Initially, like seeing a naked Emperor walking down the street it might be a disturbing proposition. But facing reality, rather than seeing what you want to see, is always a good first step to creating a better future.