Property Collective
11 min read
Is the property development boom over? Here’s what the experts are saying
It's hard to ignore the doom and gloom surrounding the property market right now. With house prices cooling, and not just from the winter chill, it's understandably a worrying time for homeowners, investors, and property developers.
But is everything really as it seems? We’ve taken a look at what’s been covered in the media recently, and here’s what we found.
The need for housing and modern infrastructure is unlikely to go away anytime soon. So the question is, how will developers continue to meet demand with greater challenges to face over the coming years?
It may be that they move to less risky options - such as properties with a higher price point. In this article from Stuff.co.nz, Property Ventures Real Estate Director Mark Honeybone says that there seems to be no problem getting pre-sales for townhouses over the $1m mark. A lot of the buyers in that market are downsizers, so they have the ability to finance their purchases.
Whereas there might not be a lot of profit to be made by developers building low cost properties, because there is less of a guarantee that first home buyers or those with a smaller budget will be able to get lending approved.
Of course, costs are continuing to rise - construction materials, interest rates, and inflation, which has some developers cautious about making their next move.
Then there are those who say there’s an opportunity to ‘grab a bargain’. Depending on a developer's financial situation, they may be able to secure prime real estate for far less than they would have been able to at this time last year. This could help to offset the price of materials and allow them to still see a healthy profit margin.
As a comparison, the previous peak for construction cost rises was at the end of 2017, when they were up 6.9 percent. So far, we're sitting at 6.1 percent, but some economists are hinting they may rise further.
From August 2022, changes to New Zealand’s planning laws will mean that buildings of up to three storeys, on most sites in cities, will no longer need resource consent. This will effectively force local councils to allow more dense housing, intensifying urban development in our main centres.
Alongside this, the National Policy Statement on Urban Development (NPS-UD) will stop councils from being able to restrict height limits of less than six storeys and car parking requirements in urban zones.
These law reforms will have a significant impact on what developers will be able to achieve in the short and long term, ultimately opening up more opportunities with fewer regulations. In suburbs where previously only one house could be built on a site, developers will be able to construct townhouses - making that kind of real estate far more desirable.
What many commentators on the property market are saying is that it will probably be the smaller developers, with less buffer available to ride the strain on financing and lending, who will feel the crunch on construction. According to Bruce Patton, the only people who will lose money in this current market are those who have to sell.
“If you don't have to sell and you can ride out whatever the next one to two years brings... because what we always get off the back of a slow or declining market is another boom."
And that’s if they are even able to get financing. Economist Tony Alexander says that banks know that booms in the construction cycle will result in an influx of inexperienced, over-optimistic developers - so they won’t be quick to lend to those who are new to development (with non-banks tightening up too).
Alexander goes on to say that larger and established developers should be okay. However, there is the possibility that lenders will tighten their credit criteria further as the cycle continues to wind down.
“But we are miles away from it impacting on the supply pipeline. There is no shortage of projects in the works, even if finance has tightened up for others. So a large number of projects would have to be cancelled first.”
Plenty of those in the industry are saying that this is no doubt a tough period for developers but that it is unlikely to hit as hard as the Global Financial Crisis.
Valocity’s head of valuations, James Wilson, commented in early May that there was no widespread liquidity crisis among banks or lenders (like there was during the GFC), nor are there any signs of a general funding pull-out.
And Infometrics principal economist, Brad Olsen, has described the current climate as not so much as a ‘bubble being popped’, but more of a tyre with a slow leak. He is also interested in how a fresh injection of immigration into the country will add to overall demand.
Alexander is also optimistic in his predictions of what the rest of the year will bring. Yes, there is a chance of a ‘recession’ of sorts, but it probably won’t look like what you would think it would. In other words, there’s no need to actively panic.
As with most things, it’s important not to just let one source, or one headline, tell the whole story. We recommend going in deeper to get an accurate understanding of what’s happening at the ground level, literally and figuratively.
And if you’re needing insights that you can rely on for your next project, our products could be just what you’re looking for - check them out here.
But is everything really as it seems? We’ve taken a look at what’s been covered in the media recently, and here’s what we found.
The demand is still there
The need for housing and modern infrastructure is unlikely to go away anytime soon. So the question is, how will developers continue to meet demand with greater challenges to face over the coming years?
It may be that they move to less risky options - such as properties with a higher price point. In this article from Stuff.co.nz, Property Ventures Real Estate Director Mark Honeybone says that there seems to be no problem getting pre-sales for townhouses over the $1m mark. A lot of the buyers in that market are downsizers, so they have the ability to finance their purchases.
Whereas there might not be a lot of profit to be made by developers building low cost properties, because there is less of a guarantee that first home buyers or those with a smaller budget will be able to get lending approved.
Costs will continue to rise
Of course, costs are continuing to rise - construction materials, interest rates, and inflation, which has some developers cautious about making their next move.
Then there are those who say there’s an opportunity to ‘grab a bargain’. Depending on a developer's financial situation, they may be able to secure prime real estate for far less than they would have been able to at this time last year. This could help to offset the price of materials and allow them to still see a healthy profit margin.
As a comparison, the previous peak for construction cost rises was at the end of 2017, when they were up 6.9 percent. So far, we're sitting at 6.1 percent, but some economists are hinting they may rise further.
New intensification rules
From August 2022, changes to New Zealand’s planning laws will mean that buildings of up to three storeys, on most sites in cities, will no longer need resource consent. This will effectively force local councils to allow more dense housing, intensifying urban development in our main centres.
Alongside this, the National Policy Statement on Urban Development (NPS-UD) will stop councils from being able to restrict height limits of less than six storeys and car parking requirements in urban zones.
These law reforms will have a significant impact on what developers will be able to achieve in the short and long term, ultimately opening up more opportunities with fewer regulations. In suburbs where previously only one house could be built on a site, developers will be able to construct townhouses - making that kind of real estate far more desirable.
Challenges for ‘the little guys’
What many commentators on the property market are saying is that it will probably be the smaller developers, with less buffer available to ride the strain on financing and lending, who will feel the crunch on construction. According to Bruce Patton, the only people who will lose money in this current market are those who have to sell.
“If you don't have to sell and you can ride out whatever the next one to two years brings... because what we always get off the back of a slow or declining market is another boom."
And that’s if they are even able to get financing. Economist Tony Alexander says that banks know that booms in the construction cycle will result in an influx of inexperienced, over-optimistic developers - so they won’t be quick to lend to those who are new to development (with non-banks tightening up too).
Alexander goes on to say that larger and established developers should be okay. However, there is the possibility that lenders will tighten their credit criteria further as the cycle continues to wind down.
“But we are miles away from it impacting on the supply pipeline. There is no shortage of projects in the works, even if finance has tightened up for others. So a large number of projects would have to be cancelled first.”
Short-term pain for long-term gain?
Plenty of those in the industry are saying that this is no doubt a tough period for developers but that it is unlikely to hit as hard as the Global Financial Crisis.
Valocity’s head of valuations, James Wilson, commented in early May that there was no widespread liquidity crisis among banks or lenders (like there was during the GFC), nor are there any signs of a general funding pull-out.
And Infometrics principal economist, Brad Olsen, has described the current climate as not so much as a ‘bubble being popped’, but more of a tyre with a slow leak. He is also interested in how a fresh injection of immigration into the country will add to overall demand.
Alexander is also optimistic in his predictions of what the rest of the year will bring. Yes, there is a chance of a ‘recession’ of sorts, but it probably won’t look like what you would think it would. In other words, there’s no need to actively panic.
As with most things, it’s important not to just let one source, or one headline, tell the whole story. We recommend going in deeper to get an accurate understanding of what’s happening at the ground level, literally and figuratively.
And if you’re needing insights that you can rely on for your next project, our products could be just what you’re looking for - check them out here.
