Economist Rodney Dickens looks at the potential of a strong upturn in residential building activity with reasons to be cautious.
In the last several months, consents for new dwellings have risen strongly; roughly as should be expected given the scale of the initial fall in interest rates. This raises the potential of a normal, quite strong upturn in residential building activity this year.
However, there are still some reasons for being a little cautious about how strong the upturn in building will be over the next year or so. There is also the likelihood of a market-led increase in interest rates this year in response to strengthening economic growth that will pose some threat to building next year.
It takes around 13 months for interest rates to impact on consents for new dwellings. This is shown in the first chart. The black line is the monthly number of consents, left scale. The red line, right scale, is the average mortgage rate listed by the major banks with it being advanced or shifted to the right by 13 months reflecting how long it takes for interest rates to impact on consents. Despite still quite low population growth, consents have risen in recent months roughly as should be expected given the scale of the initial fall in interest rates.
At face value, the first chart points to national consents rising from recent lows of around 2,700 per month to around 4,000 per month by the end of the year.
Other factors will have an impact, but as shown in the first chart, interest rates are, more often than not, the most powerful driver of upturns and downturns in consents. However, existing dwelling sales reported by REINZ also got off to a strong start in response to the initial fall in interest rates but then the upturn stumbled despite interest rates continuing to fall. This can be seen in the second chart that shows interest rates – red line, right scale -taking around four months to impact on existing dwelling sales reported by REINZ – black line, left scale.
What happened to existing dwelling sales used to be a good guide to what would happen to new dwelling consents in the near-term future. If the relationship was still close, the limited upside in REINZ sales in the second half of last year would imply a similar fate for consents (ie. the strength of the rise fading after an initially strong start). However, the relationship has become much less close in the last decade because of Government and Reserve Bank policies impacting differently on new versus existing housing. Building prospects should improve materially this year despite questions over how much.
