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Housing boom holds off recession

By Neville Bennett

Friday 9th May 2003

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Houses are being built at the greatest rate since the 1970s. It is not often the building sector becomes the most important in the economy, so this is a significant moment.

The boom raises the question of whether its momentum can ward off the looming recessionary clouds appearing offshore.

Building is an important part of fixed capital investment. It also has important multiplier effects, for a dollar spent on builder's wages has a tremendous downstream effect on many industries, from vehicles to fast foods.

There are also implications for monetary policy, especially the effect of construction on retail prices.

I have previously argued (NBR, April 24) there are signs of a real estate bubble in some categories and areas. There seems to be a shortage of desirable properties in some locations and the market is increasing supply by building.

There is tremendous activity in areas favoured by good weather, such as Queenstown, Tasman, Nelson, the Marlborough Sounds and near Christchurch (to provide only South Island examples). Nevertheless, Auckland is dominant; a huge 43% of new buildings are in the Auckland region.

High and increasing real estate values also encourage some householders to take the plunge in signing a contract to build new homes in the area of their dreams. Others believe the property market offers the most secure and reliable investment returns.

One novel feature is investors tapping the overseas student rental market with conversions and purpose-built accommodation.

Economists have little to say about builders. I checked a small library of economic textbooks but there were no index entries for "building/builders/construction." Economic historians are more interested, with both Juglar and Kuznets emphasising building in the upward movement of their business cycles. Building thrives in booms. The sector typically over-expands in the boom and sheds labour in the downturn. Building is a volatile contributor to the economy.

Statistics New Zealand data quantify the boom. In years ending in March, new dwellings have increased from 20,766 in 1999 to 28,320 in 2003. But while the number has increased by a third, the value of the dwellings has nearly doubled. The value has increased from $2.775 billion to $4.537 billion. In the same period, the value of apartments has doubled. The value of total residential building has increased from $3.456 billion in 1999 to $5.413 billion in 2003.

The boom also does not extend to non-residential buildings. These have been rather flat since 1999 but there have been some fluctuations. The types of building (in terms of value) are factories, education, hostels, storage, offices, shops, farms, hospitals and hotels. The total value of all building, including alterations and additions, is $8 billion. It was only $6 billion two years ago.

It is hard to comprehend $8 billion without some comparisons. New Zealand's gross domestic product in 2002 was $108 billion, so building is about 8% of activity. That $8 billion is greater than the export of dairy products ($7.39 billion in 2002).

The funding of this huge enterprise must be complicated, probably involving substantial overseas funds. Residential mortgage finance is generally sourced from banks. The money deposited by domestic savers is inadequate to fund this demand, so the banks borrow overseas on wholesale markets, often from their parent banks, which have superior credit ratings and can access money at beneficial rates.

An increase in overseas indebtedness is a cause for mild concern, as it is better to be a capital exporter than importer.

The boom will inevitably raise concern that money is being invested in non-productive activities. Some housing investments yield an income. Many houses are somewhat lavish and mark their residents' status.

They do not yield an income; rather they can be a depreciating asset. Some observers would prefer this vast capital sum to be invested in farms and factories. Those economists concerned with growth and productivity lament this allocation of resources.

Certainly, residential buildings are a large proportion of New Zealand's gross fixed capital formation. The data is somewhat complex but in the last quarter of 2002 new residential buildings were valued at $1.7 billion, approximately a quarter of total fixed capital formation ($6.5 billion).

If non-residential buildings and construction are combined with investments in residential building the whole building/construction sector accounts for nearly half of all fixed capital investment. The sector is as large as the combination of land improvements, transport equipment, plant machinery and equipment.

What is driving the boom? A popular reason is immigration. This is a factor but its importance can be exaggerated. Net immigration for the year was 41,000, many of whom were in families or students intending to stay for a year. A great inflow (double that of 2002) of people from the UK may be significant for housing and also returning Kiwis.

It would be interesting to do research on who occupies new houses, especially in the lifestyle areas such as Queenstown, Nelson or Bay of Plenty. Anecdotal evidence suggests many are retirees or people dropping out of the salaried rat race, and trying to set up new sources of income.

This suggests the demographics are skewed to "the lucky generation" of ages 45-60. These people had all the benefits of the welfare state, a free education and full employment.

The timing of the boom is determined to a high degree by lower interest rates. Rates have been stable for a year or so, and are now falling. A dream of a superior house in a superior location is more attainable now for many than ever before. The boom is characterised by the construction of much bigger and more expensive houses.

This boom seems big enough to keep the economy out of recession, even when export returns are declining. Its effects are mildly inflationary. Shortages of materials, and more particularly of labour, are leading to some price increases.

The boom will gradually subside. Its presence should be noted for there have not been many housing booms. It could well be another 20 years before one affects the whole nation but some favoured regions will always grow.

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