Building forecasts. October 2017

Transcription

1 Building forecasts October 2017

2 2 Building forecasts October 2017 Conditions of sale While every effort is made to ensure that the information contained in this publication is accurate, Infometrics Ltd accepts no responsibility for any errors or omissions, or for any loss or damage resulting from reliance on the use of the information, forecasts or opinions it contains. Reproduction of any of the contents of this publication will be regarded as a breach of copyright. Furthermore, it is a condition of sale of this publication that the forecasts and opinions expressed herein will not be communicated to another person or company. information Unless otherwise stated, the source for all data is Statistics NZ. This forecast is based on data available up until 12 October For more information, contact: Gareth Kiernan garethk@infometrics.co.nz, Mieke Welvaert miekew@infometrics.co.nz, Hilary Parker hilaryp@infometrics.co.nz,

3 3 Building forecasts October 2017 Residential remains key driver of possible growth 40k 30k 20k Year-ended construction, gross fixed capital formation, 2009/10 $m Residential Non-residential Other construction Although the construction sector has taken a bit of a breather through the middle part of 2017, total activity is forecast to grow by another 14% over the two years to December The residential subsector will contribute two thirds of that growth as the industry continues its efforts to respond to demand pressures in Auckland. Government initiatives to provide more affordable housing will also contribute to demand, although capacity pressures in the labour market continue to pose questions about how much further activity can expand. Prospects for infrastructure work look positive throughout the forecast period, given pre-election spending promises and the stresses placed on existing networks by recent population growth. Although residential construction is forecast to ease by 16% over the three years to June 2022, supply-constrained growth in the near-term would result in the necessary work being extended over a longer timeline. Even with this forecast dip in residential building, we still predict total construction activity in the June 2022 year to be 5.5% above current levels. 10k 0k 13 Jun-14 Sep-15 Dec Jun-19 Sep-20 Dec-21

4 4 Building forecasts October 2017 Contents story Grappling with the potential for further growth Background drivers Rule changes to soften net migration Rate rises still coming, just not quite as quickly NZ dollar holds its value Wage increases on the horizon Lower house price inflation weighs on consumption New government faces a tight budget Continued growth in tourism forecast Cost pressures persist until 2019 Non-residential Tight labour market limits office building decline Most markets set to slow as supply of space increases Retail buildings planned, but will they really happen? Strength in 2018 followed by non-res consolidation Construction and commodity prices boost factories Distribution needs limit warehouse building downturn Tertiary building boom coming to an end Short-term drop, but more hospital building to come Waiting on the infrastructure boom Need for more hotels nowhere near satisfied First signs of a social building frenzy Residential Rental growth slowing in the upper North Island Forget and stabilisation, as house sales keep sinking It's all downhill from here Catch-up needed for shortfall of previous years We can build more, or can we? Attached dwellings a key part of short-term growth Tougher conditions for alterations and additions articles Auckland s housing crisis looks bigger than ever Reserve Bank unlikely to consider rolling back LVRs No signs of a housing rebound any time soon

5 5 Building forecasts October 2017 story Grappling with the potential for further growth A stronger primary export sector, increasingly stimulatory fiscal policy, and the continued need for more housing in Auckland shape as the key drivers of our predicted acceleration in economic growth during We forecast that GDP growth will peak at 3.7% at the end of However, labour capacity pressures in Auckland s residential construction sector could still stymie growth over the next 18 months, while the spectre of property price falls is hanging over the housing market. Over the mediumterm, the economy s recent reliance on an expanding population and growing construction activity is likely to be exposed. By the early part of next decade, we predict that New Zealand will struggle to maintain positive growth on a per-capita basis. New Zealand s rate of economic growth has slowed this year, an outcome that we started warning about in 2016 as concerns about capacity constraints came to the fore. Although the slowdown has not been as drastic as allowed for in our forecasts we have revised up the expected trough in growth from 1.9% in our July publication to 2.4%pa the tone of those forecasts was correct. Economic growth looks especially lacklustre when considered on a per-capita basis. So far, so middling. But with several other forecasters now expressing doubts about the economy s prospects during 2018, we continue to predict a renewed acceleration in growth next year. Recovery in export growth is underway The most compelling driver of faster economic growth will be exports. In June, export volumes recorded their second-strongest quarterly growth result this millennium on the back of resurgent dairy and forestry volumes. Although a rebound in the dairy sector had been anticipated given last season s difficult weather conditions, the timing was earlier than expected. As with dairy, forestry s rise appears to be at least partly linked to improved commodity prices. Outside these two stand-out areas, there is broad-based strength in export prices. In New Zealand dollar terms, meat prices have surged 10% over the last year on the back of a 15% lift in lamb prices. Aluminium prices have risen 17% over the same period, in line with a general trend of improving hard commodity prices. And inflation-adjusted export prices for fruit and vegetables are at their highest level in more than six years as the horticultural sector enjoys solid international demand conditions.

6 6 Building forecasts October 2017 Export recovery a little sooner and stronger comparison of export volumes, year-end % changes Oct 17 f orecast Jul 17 f orecast 10% 7.5% 5% 2.5% 0% -2.5% Our forecast pick-up in goods exports will drive total export volumes up by 4.2% over the year to September This result would be stronger but for the tourism industry, which is now striking more challenging conditions. Year-end growth in visitor arrival numbers has eased to a 20-month low of 9.3%pa, and even that growth rate has been inflated by percentage points by the World Masters Games and Lions Tour. Chinese visitor numbers fell in the 12 months to July for the first time in seven years. This slowdown reflects the fact that growth in Chinese visitors to New Zealand over recent years has far exceeded growth in the total number of Chinese people holidaying abroad a trend that could not be sustained. Only solid growth in Australian arrivals (up 6.3% in the last 12 months) has prevented a sharper slowdown in the industry. More moderate increases in Chinese visitors will limit overall growth in tourist numbers throughout the forecast period. We predict that total arrival numbers will lift by an average of 5.0%pa over the two years to June 2019, with growth slipping back to average 3.1%pa between then and June This softer growth will give the government and tourism operators a chance to address some of the capacity

7 7 Building forecasts October 2017 pressures that have emerged due to the sector s rapid expansion since Growth in tourism gets harder to achieve Visitor arrival numbers, year-end % change Year-end % change 15% 10% 5% 0% -5% The perennial question of how high construction can go The second major driver of our forecast pick-up in economic growth next year is the construction sector. Increased building activity has long been a feature of our expectations for 2018 and 2019 given the undersupply of housing in Auckland and mounting government efforts to try and address affordability problems. Furthermore, recent construction data has been slightly more positive than we had anticipated. However, the real test for our forecasts will come during The property market has failed to stabilise in the wake of last year s tougher loan-to-value restrictions, with sales volumes persistently falling since June last year, house price inflation slowing, and the average length of time for properties on the market still rising. We are forecasting a decoupling of trends in the existing housing market and trends in residential construction activity next year. This decoupling is based around the pre-existing imbalances in

8 8 Building forecasts October 2017 Auckland s housing market and the potential for direct government involvement in boosting the build rate. Nevertheless, achieving this decoupling becomes even more challenging given the labour capacity pressures that have been evident in the construction industry during the last two years. Willing consents not to follow house sales' lead Year-end % changes New dwelling consents House sales 40% 20% 0% -20% -40% Consequently, we recognise that the risks to our forecasts for construction and overall economic growth over the next 1-2 years lie to the downside. We forecast GDP growth to accelerate to a 14-year high of 3.7%pa by the end of next year, but an inability of the residential construction sector to meet burgeoning private and public sector demand could still end up being the overarching theme of the next 24 months for the economy. Although capacity pressures are less critical in the non-residential and civil construction subsectors, they also have the potential to limit future expansion in activity.

9 9 Building forecasts October 2017 More economic growth forecast next year comparison of GDP, annual % changes Oct 17 f orecast Jul 17 f orecast 4% 3.5% 3% 2.5% 2% 1.5% 1% A bit of relief in migration and interest rates Amid the sustained demand pressures being faced in the residential construction sector, there are two areas of minor relief. Firstly, we have revised down our net migration forecasts slightly since our last publication in July as the effects of National s immigration policy changes have become clearer. This shift in our forecast has knocked nearly 13,000 people off the population by mid-2022, implying almost 4,700 fewer new dwellings will be required over the next five years than previously forecast.

10 10 Building forecasts October 2017 It's a migration peak! comparison of net migration, annual running totals Oct 17 f orecast Jul 17 f orecast 75k 50k 25k 0k -25k Secondly, the threat of stress on the housing market and household budgets coming from rising mortgage rates is a little further off, with the timing of interest rate rises delayed compared to our previous projections. We have pushed out the first predicted interest rate rise by the Reserve Bank from May to August 2018, in recognition of persistently weak inflation pressures both domestically and offshore. From 2019 onwards, our forecasts of 90-day bill rates are basis points lower than previously forecast, while our 10-year bond forecasts have also been revised down by as much as 40 basis points.

11 11 Building forecasts October 2017 Delaying interest rate rises even further comparison of 90-day bill rates, quarterly averages Oct 17 f orecast Jul 17 f orecast 4% 3.5% 3% 2.5% 2% 1.5% More stimulatory fiscal policy either way At the time of preparing our forecast numbers, coalition negotiations and decisions were dragging on, making it difficult to be certain about the precise details of likely government spending and fiscal initiatives over the next three years. However, GDP data shows that government consumption spending over the year to June grew at 4.4%pa, its fastest rate since the end of 2008, when National came into power and the Global Financial Crisis hit. The increase in spending growth over the last couple of years coincides with the government accounts returning to surplus territory, enabling some loosening of the fiscal purse-strings. A bit more stimulus to economic growth ahead of an election is also handy for the incumbent party. Whichever party New Zealand First chooses to support in government, we expect this trend of fiscal stimulus to continue. Both National and Labour have made election promises around infrastructure (roading or rail) and boosting the supply of new housing. National has tax cuts via threshold adjustments due to kick in from April 2018, while Labour would like to reverse these cuts and adjust Working for Families instead.

12 12 Building forecasts October 2017 Perhaps most importantly, the bidding war to gain Winston Peters support is likely to include some fiscal initiatives in key policy areas for NZ First. We saw a definite change in fiscal direction following the 1996 election as National s programme of tax cuts was put on the backburner and more spending was directed towards Winston Peters priorities. A shift was less apparent following the 2005 election, although the SuperGold Card was a sizable legacy initiative of NZ First s support for Labour during that parliamentary term. Perhaps the biggest wildcard is around Winston Peters proposal to shift port operations out of Auckland and up to Whāngārei. Although this grand plan would take about ten years to implement, it would have significant implications for infrastructure spending across the port facilities in Whāngārei, as well as roading and rail links between Whāngārei and Auckland. Is it all just a population phenomenon? The re-emergence of faster export growth and the capacity risks around the construction sector highlight the possibility of a divergence in trading conditions for externally and domestically focused businesses over the next months. This outcome would be the reverse of the last couple of years, when dairy has been a significant drag on provincial economies, while firms focused on construction and tourism have prospered. Over the longer-term, the role of strong net migration and the necessary construction response in fuelling New Zealand s economic growth during the last few years will become more apparent. Between December 2018 and December 2021, we are forecasting economic growth to tail off from 3.7%pa to just 1.4%pa. Slowing population growth will be part of the story it is forecast to ease from 2.2%pa in March 2017 to 2.0% by the end of next year and 1.4%pa by December Per-capita growth is likely to be stronger in the near term than it is currently, but once we have got over the construction hump associated with the strong population growth that has occurred, prospects for the economy look less rosy. By 2021, our forecasts see per-capita growth barely staying in positive territory a very weak result when compared with the average per-capita growth of 1.4%pa over the last 20 years.

13 13 Building forecasts October 2017 Building more houses, but then what? GDP per capita, year-end % change Oct 17 f orecast 2% 1.5% 1% 0.5% 0% -0.5% Even in this environment, capacity issues will linger. We predict that the unemployment rate will hold at or below 5.0% throughout the forecast period, and wage inflation will lift back into the %pa range by the second half of 2018.

14 14 Building forecasts October 2017 Background drivers

15 15 Building forecasts October 2017 Rule changes to soften net migration 75k 50k 25k 0k -25k Annual net migration Oct 17 f orecast Jul 17 f orecast Feb 17 f orecast Have we peaked? Is our update on August migration figures. Policy alterations aside, we would have kept our migration outlook unchanged during this forecast round. Annual net migration has peaked at 72,400 and will hold above 70,000 for the rest of 2017, but work visa rule changes will begin pushing up departures from the start of Immigration NZ has quantified the number of people no longer eligible to roll over their essential skills work visa due to August s rule changes at 21,500-23,000 people, so we ve had to substantially revise up our departure figures for next three years. At the same time, we ve revised up our estimates of essential skills work visa arrivals, as firms will need to replace workers than cannot stay for more than three years. The assumption that firms will easily be able to bring in new hires when they can no longer roll over their current employees visas poses a downside risk to our forecasts. As a result, we have taken a conservative view when revising up our forecasts of arrival numbers. Even so, the risks to our net migration forecast are still on the downside due to further possible tightening in immigration policies as well as potential difficulties in firms sourcing the necessary numbers of new migrant workers.

16 16 Building forecasts October 2017 Rate rises still coming, just not quite as quickly 8% 7% 6% 5% Mortgage rates, quarterly averages Floating Two-y ear f ixed Fiv e-y ear f ixed Waiting game continues for the Reserve Bank is our update on the most recent official cash rate decision. The Reserve Bank continues to project that the official cash rate will remain on hold, at 1.75%, until the second half of However, we expect capacity constraints and associated inflationary pressures will necessitate a response sooner from the Bank, with interest rates rising from August The need to raise interest rates is based around returning monetary conditions back towards normal and recognising that the current OCR is highly stimulatory. The slowing housing market will not prevent the Reserve Bank from lifting interest rates, with the Bank having the ability to ease other macroprudential settings (ie loan-tovalue restrictions) as required. Longer-term interest rates are expected to trend upwards throughout the forecast period. Although we have lowered this projected track given the dip in bond rates since their Trump-induced rally of late 2016 and early %

17 17 Building forecasts October Quarterly averages USD/NZD CNY/NZD (RHS) AUD/NZD NZ dollar holds its value Strong export prices, which are reflected in the high terms of trade, and improving economic growth should put a floor under the New Zealand dollar over the next months. Rising interest rates from the second half of 2018 would normally push up the exchange rate, but monetary conditions overseas are likely to tighten at least as quickly as in New Zealand, limiting the effect of any Reserve Bank action on the NZ dollar. Slower-than-expected economic growth or signs of less disciplined fiscal policy shape are downside risks to the exchange rate during 2018 and The New Zealand dollar remains close to fair value, which we believe is about US69c, against the greenback

18 18 Building forecasts October 2017 Wage increases on the horizon 8% 6% Employment and labour cost growth, annual average % changes Employ ment Labour cost index Wages Employment down, but labour market otherwise strong is our latest analysis of the labour market. Weaker-than-expected June quarter employment figures has led us to revised down our outlook for employment growth over the coming year. Nevertheless, we expect the labour market to remain tight in the near term, with the unemployment rate dropping to 4.5% by June We expect wage growth to accelerate to 2.8%pa in the year to September 2018, boosted by a lack of skilled workers in key industries. Wage inflation will remain elevated between 2.7% and 2.9%pa for the remainder of the forecast period. 4% 2% 0% -2%

19 19 Building forecasts October % 4% 3% Lower house price inflation weighs on consumption Private consumption, year-end % change Oct 17 f orecast Jul 17 f orecast Recent rises in house prices along with near record levels of net migration have provided a powerful boost to household spending, and we have revised up our forecasts of spending growth throughout the next 18 months. As flat or falling house prices knock people s confidence, we anticipate household spending growth to ease to 2.8% in the year to March Household debt reached a record high of 126% of disposable income in the June 2017 quarter, so higher interest rates and rising debt-servicing costs over the medium term will demand a greater share of household budgets and limit growth in discretionary spending. A harsher stance on migration policy from the potential incoming government could result in slower population growth and poses a downside risk to our outlook for private consumption in aggregate. 2% 1%

20 20 Building forecasts October 2017 New government faces a tight budget 4% 3% 2% 1% 0% Government consumption spending, year-end % change Oct 17 f orecast Jul 17 f orecast At the time of writing, we were still waiting on a final election result. Regardless of which government emerges from the negotiations, fiscal policy is set to be more expansionary from early This view is based on generous spending by a Labourled government on education, health, and Working for Families, while National s family incomes package promises tax cuts for low and middle-income earners. However, given that there is not a great deal of extra cash to play with outside of what is already committed, any hefty spending promises extracted by Winston Peters could come at the expense of National or Labour s preexisting plans or would need to be funded by increasing government debt. One of Winston Peters bottom lines is the relocation of the Ports of Auckland operations to Northport in Whāngārei which, in light of tight spending arrangements, is likely to be funded from 2022 onwards or in lieu of other current spending priorities. -1%

21 21 Building forecasts October 2017 Continued growth in tourism forecast 4,500k 4,000k 3,500k 3,000k 2,500k Annual visitor arrivals Oct 17 f orecast Jul 17 f orecast Our update on the number of arrivals in August can be found here. Even with tourist arrival numbers falling in three of the last four months, we still think that there is scope for considerable growth in tourist numbers over the forecast period up by 735,000pa over the five years to June In absolute terms, Australia has made the biggest contribution to arrivals growth over the past five years, and we expect this dominance to continue throughout the forecast period as a modest economic performance across the Tasman limits Australians appetite for longerhaul travel. China will remain a core driver of growth in tourism, with arrivals from China rising 26% over the five years to June Despite Chinese arrival numbers looking more positive over the last couple of months, we recognise there are downside risks to this component of our forecast. Capacity constraints also present a downside risk to our forecasts, but we think that with new commercial accommodation coming online, a rapidly expanding peerto-peer accommodation sector, and increasing central government investment in tourism-related infrastructure, that some of these pressures will gradually be alleviated.

22 22 Building forecasts October % 5% Construction costs, annual % changes Cost pressures persist until 2019 Residential Non-residential Other construction Cost pressures have been steady across all three construction subsectors over the last 3-4 quarters, but are unlikely to ease while demand pressures remain strong. Accelerating growth in infrastructure activity next year is likely to lead to greater cost increases, with civil construction costs pushing up to an eight-year high of 4.3%pa. With limited growth in non-residential construction activity beyond 2018, cost pressures in that subsector are likely to ease first, slipping below 3%pa by early Cost pressures in the residential subsector will persist for longer, although slower forecast growth in activity during 2019 and 2020 is expected to result in residential cost inflation holding below 4%pa from the second half of 2019 onwards. 2.5% 0% -2.5%

23 23 Building forecasts October 2017 Non-residential

24 24 Building forecasts October Tight labour market limits office building decline Year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast A drop-off in commercial construction work in Canterbury following the post-quake peak in rebuilding activity is currently pushing office building work lower, despite strength in other markets around the country. The tight prime office market in Auckland is underpinning refurbishment of lower-grade buildings, a trend that is likely to continue for the next 18 months. Office construction in Auckland and Wellington is likely to peak by the first half of 2019, although the outlook for activity in Wellington remains somewhat uncertain given the need for quake-damaged stock to be replaced. There are signs of increased demand for higher-quality space in central Hamilton, leading to increased refurbishment activity. Current office construction in Tauranga is likely to leave the market oversupplied in the near term. The strong Queenstown economy is driving new construction activity, which is concentrated in the Frankton area. Our longer-term forecasts for commercial construction see activity holding fairly steady, based on the continuation of a relatively tight labour market, but a possible oversupply of space in Auckland and Wellington mean that the risks to this forecast are on the downside.

25 25 Building forecasts October 2017 Most markets set to slow as supply of space increases Annual growth rates in property prices, source: Colliers International Auckland CBD of f ice Auckland metro of f ice Wellington CBD of f ice Auckland industrial Wellington industrial Christchurch industrial Auckland CBD retail Sep 16 Sep 17 Sep 18 (f ) Strong demand for high-quality office space is likely to maintain upward pressure on rents and property prices over the coming year, although the completion of major projects in Auckland between now and mid-2019 could limit capital growth. Uncertainty continues to hang over the Wellington office market following last November s earthquake, but significant price increases are still expected for seismically sound buildings over the next months until new space has been completed. Industrial space in central locations remains in short supply, but low yields on property are limiting the extent of further capital appreciation unless site usage is changed to other options with higher returns (eg bulk retail). The industrial and suburban office markets in Christchurch are significantly oversupplied, forcing down rents and preventing any capital appreciation, while the stock of retail space in the central city looks to be heading in the same direction. Wellington CBD retail -5% 0% 5% 10% 15% 20% 25% 30% 35%

26 26 Building forecasts October Retail buildings planned, but will they really happen? Year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Retail construction activity remains relatively subdued given the strength of population growth, tourism, and household spending over the last few years. One of the key facets of shop building over coming years will be the construction of new retail facilities to cater to demand in areas of new housing development, particularly around Auckland and Hamilton. There are also several shopping centre expansions and redevelopments either planned or in their early stages in Auckland. The retail property market in Christchurch is following a similar trajectory to the office market, with current signs of oversupply likely to slow the rate of future development. A steady stream of retailers going into receivership or liquidation hints at the disruptive competition that online retailing continues to provide a factor that is particularly important in provincial areas where the distance to market and smaller population base means that existing local retailers are generally more expensive and not able to provide as wide a product range as in the main centres. The continued trend towards online retailing, in tandem with a weaker housing market, pose downside risks to our retail construction forecasts over a 3-5 year horizon.

27 27 Building forecasts October 2017 Strength in 2018 followed by non-res consolidation comparison of year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Apr 17 f orecast August non-residential consent rebound shows promise discusses the latest residential consent data Strong consent results for the non-residential sector have led us to revise up our forecasts of work put in place in the near term, with activity now easing just 3.9% over the year to December Activity is forecast to climb 7.1% during 2018 to a new record high. The biggest positive contributions to growth in 2018 will come from increases in shop and social, cultural, and religious building activity. Slowing economic growth and an oversupply of lowergrade industrial and commercial properties are likely to limit further growth in non-residential building during 2019 and beyond. However, accommodation building shapes as being a key area of strength in the latter years of the forecast period

28 28 Building forecasts October Construction and commodity prices boost factories Year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast The strength of commodity prices and residential construction activity are buoying prospects for factory building. Dairy factory projects either underway or due to get started in the next six months include work at Fonterra s plants in Clandeboye (near Timaru) and Darfield, as well as Open Country Dairy s new factory at Horotiu, near Hamilton. Year-end growth in factory construction is expected to hit 21%pa by the end of 2017, with activity expanding a further 17% over the three years to December

29 29 Building forecasts October Distribution needs limit warehouse building downturn Year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Storage building is expected to hold up over the next 18 months, boosted by further increases in residential construction activity and continued strong economic growth. Investment in infrastructure remains key in determining where warehousing and distribution facilities are located, with development spreading southwards from Auckland and northwards from Wellington as improved roading opens up access to new locations. Tauranga also shapes as a key area of growth given the Port of Tauranga s rising freight volumes, while investment in inland port facilities in Hamilton will drive storage development activity in the city. Christchurch has an oversupply of industrial property, particularly lower-grade space, although limited construction activity may continue to take place at Rolleston. Having peaked in the second half of 2018, storage work put in place is forecast to ease 13% over the four years to June

30 30 Building forecasts October Tertiary building boom coming to an end comparison of year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Apr 17 f orecast There are several tertiary education building projects currently underway, including work at the Waikato Institute of Technology, the University of Waikato s Tauranga campus, the University of Canterbury, and the University of Otago. Although further projects are planned at Massey University s Albany campus, the University of Waikato, and Lincoln University, this work will not be sufficient to prevent a 15% decline in education work put in place over the two years to June Domestic student numbers are forecast to remain relatively steady, meaning that new school construction over the medium term will be mostly limited to areas of strong population expansion, such as Auckland. International student numbers appear to have stabilised over recent months at 50-60% above their 2013 level, providing a solid income stream for education institutions to upgrade their facilities

31 31 Building forecasts October Short-term drop, but more hospital building to come comparison of year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Apr 17 f orecast Hospital building continues to underperform our forecasts, and we now expect activity to contract 16% over the year to March Nevertheless, ongoing work at Christchurch and St George s Hospitals will underpin a renewed pick-up in activity throughout Construction of the new $50m Wellington Children s Hospital from 2018 will also contribute to a 35% lift in work put in place over the two years to March Dunedin and Palmerston North Hospitals remain significant projects that we have factored into our longerterm forecasts

32 32 Building forecasts October Waiting on the infrastructure boom comparison, year-end gross fixed cap. formation, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Apr 17 f orecast Total infrastructure activity continues to trend downwards, despite ongoing major roading projects in the Auckland, Waikato, and Wellington regions. The beginning of major works on Auckland s City Rail Link during 2018 is expected to underpin strong growth in infrastructure activity next year. Persistently strong population growth has increased pressure on civil infrastructure, particularly in and around Auckland, and will necessitate further investment in the upgrade and expansion of infrastructure facilities. Spending on tourism-related infrastructure is also set to lift due to increased funding from the government, while Auckland and Wellington Airports both have significant expansion plans from early next decade. National has announced the next tranche of the Roads of National Significance, while Labour s focus is more on public transport provision, including rail

33 33 Building forecasts October Need for more hotels nowhere near satisfied comparison of year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Apr 17 f orecast Auckland is currently one of Australasia s best-performing hotel markets, with the occupancy rate having risen from 61% to 74% since late New hotel developments that are starting to come online in the city may be easing capacity pressures, but further developments are likely in coming years ahead of APEC and the America s Cup regatta in Some of this future development in Auckland could be facilitated by the conversion of buildings on the edge of the CBD into hotels as an oversupply of lower-grade office space arises from Queenstown s accommodation occupancy rate has surged from 56% to 76% since mid-2013, reflecting the strength of visitor numbers (especially Australians) through the town. Even with current hotel projects underway in Queenstown and the growth in peer-to-peer accommodation, such as Airbnb, the town will need further significant accommodation over the medium term. Additional hotel rooms are also being added to the stretched Wellington and Christchurch markets. The $938m expansion of Waikeria Prison near Ōtorohanga will be a significant contributor to activity between 2018 and 2021.

34 34 Building forecasts October First signs of a social building frenzy comparison of year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Apr 17 f orecast Work on major Christchurch civic facilities, as well as convention centres in Auckland and Wellington, is forecast to drive 46% growth in social, cultural, and religious work put in place over the two years to June Although activity is forecast to ease over the following two years, other projects, including the replacement of the old AMI Stadium in Christchurch and the redevelopment of Palmerston North s Te Manawa museum, are expected to limit the extent of this contraction. Social, cultural, and religious building work is predicted to decline 17% between June 2019 and March

35 35 Building forecasts October Confidence set to boost farm building comparison of year-ended work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Apr 17 f orecast Despite work put in place easing again in the June quarter, farm consents have picked up in recent months and point towards an impending recovery in construction activity. Confidence is strong across the agricultural sector due to high commodity prices for dairy products, meat, horticulture, and wine. Having spent the last months reducing their debt levels, farmers are now in a better position to undertake capital investment, and we are forecasting a 39% increase in building work put in place over the three years to June

36 36 Building forecasts October 2017 Residential

37 37 Building forecasts October 2017 Rental growth slowing in the upper North Island 10% 7.5% Residential rents, three-month annual % changes New Zealand Auckland Waikato Soft Auckland market keeps rental inflation subdued discusses September quarter rental yield data. The continual deterioration in rental yields that has occurred over the last five years looks set to come to an end as house prices begin declining during Pressure on yields is most pronounced in Auckland and parts of Waikato, so even with house price falls, we would expect rents in these regions to continue rising. A gradual upward trend in interest rates throughout the forecast period means that the cashflow position of landlords will become less favourable, thus also maintaining upward pressure on rents. 5% 2.5% 0% -2.5%

38 38 Building forecasts October 2017 Forget and stabilisation, as house sales keep sinking 100k 90k 80k 70k 60k comparison of house sales, annual running totals Oct 17 f orecast Jul 17 f orecast Please read losing faith in the property market for our update on September house sales. The housing market is showing no signs of stabilising in the wake of last year s loan-to-value restrictions, and we have abandoned thoughts of a brief recovery in house sales during late 2017 and the first half of Softer demand for housing will continue to progressively spread from Auckland into the surrounding halo regions, other major urban centres, and more outlying provincial areas. Slowing population growth and gradual increases in mortgage rates will also to weigh on demand for housing throughout the next two years. We are now forecasting the annual sales total to slip below 60,000pa by mid-2019, the first time that sales volumes will be so low since Activity will gradually recover during the second half of the forecast period, with housing affordability improving in the wake of sizable house price falls between now and k

39 39 Building forecasts October 2017 It's all downhill from here 15% 10% 5% 0% -5% -10% comparison of house prices, annual % changes Oct 17 f orecast Jul 17 f orecast Auckland on the verge of falling house prices discusses September quarter house price figures. The removal of a significant chunk of investor demand from the market has taken the heat out of house price inflation. Investor demand has been curbed by tougher loan-tovalue restrictions and the reluctance of banks to lend based on foreign income. Reduced expectations of capital gains are also discouraging those investors who are not limited by the above restrictions from increasing their holdings of property. Furthermore, affordability problems in Auckland appear to have reached a critical level and are significantly constraining owner-occupier demand. Between September 2017 and March 2021, we are forecasting a 14% drop in average house prices as the market undergoes a correction from the excessive price growth of the last five years. Limitations on foreign purchases of property could be implemented within the next three years, restricting ownership to New Zealand citizens and permanent residents. Such restrictions would add to the downward pressure on house prices. Despite housing in Auckland being significantly overvalued, price falls might be limited by the severe undersupply of housing in the region, thereby providing an upside risk to our forecasts. Even with a recovery in property values during 2021 and 2022, real house prices are still predicted to be 15% lower at the end of the forecast period than they are currently.

40 40 Building forecasts October k 40k 20k Catch-up needed for shortfall of previous years Components of underlying demand, March years Consents Depreciation Occupancy Vacancy Population The modest downward revision to our net migration and population growth forecasts has had a small effect on estimated underlying demand for new dwellings between now and March 2022, reducing underlying demand for the five-year period by 3,360 dwellings. A slightly lower forecast track for the occupancy rate has mitigated some of this change, with total underlying demand down by 3,180 dwellings over the five years to March 2022 when compared with our previous forecasts. Although we believe that underlying demand has now peaked, we still expect to need over 30,700 new dwellings per annum by March 2020 and over 28,000 new dwellings per annum by March The substantial undersupply of housing in Auckland implies that the actual build rate can exceed underlying demand for a lengthy period as the construction industry looks to catch up for the under-build of previous years. 0k -20k

41 41 Building forecasts October k 40k 30k We can build more, or can we? comparison of new dwelling consents, annual running totals Oct 17 f orecast Jul 17 f orecast Apr 17 f orecast The modest downward revision to our net migration and population growth forecasts has had a small effect on estimated underlying demand for new dwellings between now and March 2022, reducing underlying demand for the five-year period by 3,360 dwellings. A slightly lower forecast track for the occupancy rate has mitigated some of this change, with total underlying demand down by 3,180 dwellings over the five years to March 2022 when compared with our previous forecasts. Although we believe that underlying demand has now peaked, we still expect to need over 30,700 new dwellings per annum by March 2020 and over 28,000 new dwellings per annum by March The substantial undersupply of housing in Auckland implies that the actual build rate can exceed underlying demand for a lengthy period as the construction industry looks to catch up for the under-build of previous years. 20k 10k

42 42 Building forecasts October k 6k 4k Attached dwellings a key part of short-term growth Attached dwelling consents, annual running totals Townhouses Apartments Retirement units The modest downward revision to our net migration and population growth forecasts has had a small effect on estimated underlying demand for new dwellings between now and March 2022, reducing underlying demand for the five-year period by 3,360 dwellings. A slightly lower forecast track for the occupancy rate has mitigated some of this change, with total underlying demand down by 3,180 dwellings over the five years to March 2022 when compared with our previous forecasts. Although we believe that underlying demand has now peaked, we still expect to need over 30,700 new dwellings per annum by March 2020 and over 28,000 new dwellings per annum by March The substantial undersupply of housing in Auckland implies that the actual build rate can exceed underlying demand for a lengthy period as the construction industry looks to catch up for the under-build of previous years. 2k 0k

43 43 Building forecasts October Tougher conditions for alterations and additions comparison of year-end A&A work put in place, 2009/10 $m Oct 17 f orecast Jul 17 f orecast Apr 17 f orecast Although alterations and additions work put in place in the June quarter was 4.6% lower than a year earlier, activity over the last 12 months was still 18% greater than consent growth indicated. This divergence hints at increased lags between consent and completion, which implies that further declines in work put in place are likely. The drop-off in activity in the housing market will have flow-on effects for renovation work, with lower housing turnover reducing work associated with the purchase and sale of property. Affordability issues in Auckland might mitigate the extent of the drop-off in A&A work in the region, with some homeowners settling for expanding their existing property given the high cost of moving and upgrading to a larger property. Nevertheless, tight credit conditions and stagnant or falling house prices will make it progressively more difficult for homeowners to finance renovations by topping up their mortgages. Further declines in post-quake repair work in Canterbury will also drag A&A activity lower. We expect A&A work to fall 24% over the four years to March 2021, reaching its lowest level since 2013.

44 44 Building forecasts October 2017 articles Auckland s housing crisis looks bigger than ever Auckland Council s estimate that only 6,260 new dwelling units were completed during 2016 earlier this week came as shock given previous indications of the amount of residential building activity taking place in the city. Consent numbers for Auckland in the last calendar year totalled 10,026, while Statistics NZ published figures earlier in July estimating that 7,872 dwellings were completed in the city during Our graph shows the estimated completion figures published by Statistics NZ for Auckland over the last 20 years alongside consent numbers during this period. As would be expected, there is a lag of between six and 12 months between consent and completion. It s less apparent from the graph, but Statistics NZ s modelling also allows for 2-3% of consented dwellings not to be built. This cancellation rate got as high as 7.0% for dwellings consented during 2008 when the Global Financial Crisis hit.

45 45 Building forecasts October 2017 Comparing consents and completions Annual running totals for Auckland 15k Completions Akl Council Completions StatsNZ Consents StatsNZ 12.5k 10k 7.5k 5k 2.5k Understanding Statistics NZ s numbers Statistics NZ s work is based on two main data sources: the quarterly Building Activity Survey, which is used to produce work put in place data, and final inspections data provided by Christchurch City Council. The latter dataset was particularly important to ensure that the model behaved correctly during the post-quake rebuild period. Ideally Statistics NZ would use inspections data from across the country, but the Building Activity Survey provides this nationwide coverage. Nevertheless, there are some possible limitations regarding Auckland. The composition of dwelling types in Auckland suggests that lag times are longer than the average across the rest of the country. Standalone houses in Auckland make up the smallest proportion of consents for any region and, at 49.3% over the last year, this figure is only just below 2004 s record high. Statistics NZ s modelling shows that attached dwellings take longer to be completed. So even if houses take the same length of time to complete in Auckland as they do around the rest of the country, the fact that more of Auckland s dwelling consents are for attached dwellings means that the average lag over all new dwellings in the city will be longer. Building Activity Survey data since 2015 only considers consents over $900,000, which is

46 46 Building forecasts October 2017 likely to exclude most new dwelling consents. However, Statistics NZ notes that, for higher-value houses, the lag between consent and completion appears to be shorter now than it was in December Thus it seems reasonable to assume that the lag for lower-value houses has not changed. Statistics NZ s model might be overestimating current completion rates. Statistics NZ has noted that the surge in dwelling completion numbers since September 2016, particularly in Auckland, has been driven by modelled data, and contrasts somewhat with slowing growth in residential work put in place as measured by the Building Activity Survey. This statement hints at some concern about whether the modelling, based on historical relationships, is adequately coping with the large volume of consents currently being issued, especially given that demand for residential construction services is highly concentrated from a regional perspective. So what do we make of Auckland Council s data? The most disturbing aspect of Auckland Council s data is that, even allowing for a 3% cancellation rate of issued consents, the annual consent total has not been as low as the Council s 2016 completion figure since early A lag of almost three years between consent and completion is wildly at odds with Statistics NZ s estimates and our own modelling. An even more critical limitation is that building work must be completed within two years of a consent being issued unless an extension is granted. It seems reasonable to assume that more consents than usual might currently be getting extended, but it is unlikely that this situation applies virtually across the board in Auckland. The other possible explanation is that cancellation rates in Auckland have been significantly higher over the last 2-3 years. About a year ago, there were several stories about larger-scale residential developments not going ahead because developers were not able to obtain finance. The typical scenario was that the developer had previously secured funding, then pre-sold the apartments and collected deposits, but then needed to go back to the bank for additional funding because building costs had risen 10% or more since they originally got their finance. By this stage, the banks were becoming increasingly nervous about property values in Auckland, particularly in the more volatile apartment market, and refused to extend any further funding to the developer. With a lack of secondtier options like the finance companies that existed 15 years ago, the project ended up not going ahead. Our conclusions are all bad Our assumption had been that these projects had been falling over at the pre-consent phase. But it is conceivable that some consented projects did not go ahead. If that is the case, there are two important implications. Auckland s undersupply of housing, which we estimated to be more than 37,000 dwellings at the end of 2016, is even larger than previously thought.