Tony Alexander on Housing – Economic Analysis – Sporadic 7 – May 5 2015

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Tony Alexander, BNZ economist.

By Tony AlexanderBank of New Zealand Economist – Economic Analysis:

Headline: Sporadic 7 – May 5 2015

Tony Alexander, BNZ economist.
Tony Alexander, BNZ economist.

Auckland has a housing shortage, and as illustrated last week, you can generate a large estimate of it very easily. In this issue of Sporadic we calculate the under-building of houses in Auckland since 1996, show how you can produce your own estimate of the shortage, graph the correlation between annual under-building and house price changes, and also graph the continuing rise in that under-building since 2002. The price implications of this simple analysis are clear. We also look at the two recent periods when Auckland house prices fell and postulate what it is that will cause the next period of decline.

Auckland Housing Shortage Again Sporadic 7

Well that was interesting. A refresher course in reading comprehension appears necessary for a number of journalists based upon some comments made in response to Sporadic 6. In that document last week I raised the issue of what is meant by the term “shortage” in the Auckland housing market, and introduced one definition of the number of houses needed to give the same household occupancy rate in Auckland as the rest of the country.

One group responsible for forecasting a 40% collapse in NZ house prices in 2008 claimed it meant that was my estimate of what is needed to beat the current “crisis”. It wasn’t.

What I aimed to show was that in any discussion of Auckland’s shortage there has to be agreement on what shortage means – and there is not. In fact lets undertake this little exercise. One common way of calculating the shortage is to pick a year, estimate Auckland population growth since then, calculate the number of houses needed to give an unchanging occupancy rate, then compare that with the numbers actually built and the difference is the shortage.

The important assumption people make when running this exercise is that the starting year was when things were normal and enough construction is needed to get back to that year. There is little chance that your personal pick for that nirvana year of the good old days is the same as the person standing next to you, thus you will have different estimates of what the shortage is. So to calculate the shortage people must first of all agree on what year they want to take Auckland back to. As an aside, if someone has backcalculated the current Auckland region population and occupancy rates before 1996 could you send me the data please. I’d like to see when Auckland’s occupancy rate started deviating from the rest of New Zealand.

In the table on the following page (see: full analysis document pdf 301kb) alongside each year we show the change in Auckland population from a year earlier, then the number of consents issued that year, adjusted downward 20% to allow for consents not taken up, consents for holiday homes, and demolition of existing houses. To help explain that adjustment here is a quote from a Department of Prime Minister and Cabinet report on housing.

“Building consent data is used to estimate the rate of construction of new houses, with an assumption that only 80% of new building consents translate into net additions to the country’s occupied housing stock. The remaining 20% is accounted for by consents not acted on, holiday homes and by activity that is replacing deletions from the housing stock”

(Ref. DPMC) If you go to the source link you’ll find a piece of analysis akin to what we did in Sporadic 6. Here is a link specifically on the NZ demolition rate from BRANZ. (Ref. see pdf.)

(Download full analysis document here (pdf 301kb).)

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Selwyn Manning, BCS (Hons.) MCS (Hons.) is an investigative political journalist with 23 years media experience. He specializes in reportage and analysis of socioeconomics, politics, foreign affairs, and security/intelligence issues. Selwyn has extensive experience as a commentator and has provided live political analysis to a wide range of television and radio organizations broadcasting in New Zealand, Australia and globally including the BBC (Five Live, London) and BBC (World Service). He is currently a correspondent to Australia's FiveAA radio, and is a regular live-on-air panelist on Radio New Zealand's The Panel with broadcaster Jim Mora.

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