Appendix 1: Gisborne District Quarterly Market Indicators Report April 2018 National Policy Statement on Urban Development Capacity Quarterly Market Indicators Report April 2018 1
Executive Summary This report is a requirement of the National Policy Statement on Urban Development Capacity. It provides an overview of trends within the residential and business property markets through analysis of several statistical market indicators provided by the Ministry of Business, Innovation and Employment (MBIE). It will contribute to Gisborne District Council s understanding of the planning environment and provide insights into how the Tairawhiti Resource Management Plan is either enabling or constraining development in the urban area. It is important to note that at this stage, the data shows no clear trends. The intention of this programme is to monitor market indicators and use those as a guide for further investigation. The purpose of this report is to highlight what we don t know and provide insights into where our resources would be best spent investigating further. Future reports will attempt to provide more useful insights for Council as well as contributing to the research that will inform the Housing and Business Assessment, the large scale assessment of Council s development capacity, due at the end of 2018. Introduction This is the first quarterly market indicators report prepared by Gisborne District Council (Council) as part of its obligations to the National Policy Statement on Urban Development Capacity (the NPS). This report provides a starting point for Council to broaden its understanding of the housing market. It contains significant explanation of the indicators used and how their data should be interpreted. The data used in this report comes from MBIE, via the Urban Development Capacity Dashboard as well as consenting data held by Council and some open source data from Corelogic and Statistics New Zealand. Background The NPS requires councils to ensure their district plans have sufficient development capacity to meet projected growth in the urban area. Development capacity refers to how much land is zoned for urban development to meet market demand. To achieve this the NPS requires councils to monitor growth rates in the residential and business sectors so that we can say with accuracy whether or not we have enough development capacity in the short, medium and long term to meet the growth needs of our community. This report has been prepared to meet the requirements of policy PB6 of the NPS. 2
Market Indicators Population Statistics NZ information indicates that the region s total population has been growing slowly since 2002 at an annual average growth rate of 0.4%. To the year ended June 2017, the regional population increased by 600 or 1.3%, to 48,500. Figure 1: Gisborne District Projected Population Growth Consents Residential In 2017 there was a 38% increase in the total number of new dwellings consented and a 36% increase in their combined value. The graph below shows new dwelling consents with the total annual value of all consents in blue and the total annual number of consents in orange. As the number of consents fell between 2008 and 2014, the total value held reasonably steady and grew from 2014 onwards. This suggests a few scenarios: constructions costs are rising so fewer houses can be built for the same money the types or sizes of houses being consented have shifted more to larger luxury dwellings. There may also be other contributing factors not visible in this data. 3
$40 Annual Total Value of New Dwelling Consents 140 $35 120 Value of Consents (Millions) $30 $25 $20 $15 $10 $5 100 80 60 40 20 Number of Dwellings $0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year/No of Consents 0 Figure 2: New Dwelling Consents Figures 11 and 12 show us that while land values have increased, their share of total capital value has decreased. This suggests that increases in land values are falling behind increases in construction costs. This increase in construction costs could account for the rising total value of consents. Consents Commercial The following data covers consented new building activity over the 2017 calendar year. There has been a 20% decrease in the number of new commercial buildings consented but a 93% decline in their combined value (five consents in 2016 totalling $19.7m compared with four consents in 2017 totalling $2.7m). a 29% fall in the number of new industrial buildings consented and a 72% decline in their combined value a quadrupling in the volume of all new community building work consented but an overall decline in the combined value of this work a 5% decrease in the number of all consented building alterations but a 30% increase in the combined value of these alterations. 4
Commercial Building Consents Total annual value / Total annual number $25,000,000 9 $20,000,000 8 8 $18,841,000 8 $19,725,000 8 7 TOTAL VALUE $15,000,000 $10,000,000 $5,000,000 $14,387,000 6 $5,467,000 $9,986,000 2 $4,550,000 $2,907,000 5 5 4 $2,700,000 6 5 4 3 2 1 TOTAL NUMBER $ 0 YEAR Sum of WORK VALUE Count of ID Figure 3: Commercial Building Consents As both the value and the number of consents is highly sporadic, the commercial data available at this time does not suggest any clear trends. A wider range of commercial data sources including vacancy rates in retail, commercial and industrial buildings, and available commercially zoned development capacity will be sought for future reporting. Dwelling Sales Price This indicator is a useful starting point for analysis of the housing market. It provides a broad picture of price levels and historic trends. It presents only median house prices. These are heavily influenced by the sale of existing stock, as new builds are a small portion of total sales and also by the type, size and quality of the houses sold. Significant dwelling price growth can suggest limited supply, increased feasibility of new developments or external factors acting upon the regional market, or all three. Indicators like Dwelling Sales Price need to be viewed as part of a package if they are to provide value. Housing prices have been consistently increasing across the market, rising by 28% since early 2016. A number of drivers may be influencing this growth including recent net migration, improved local economic performance and investment from outside the region. Future reports will investigate this trend and attempt to gain a clearer picture of the influences. 5
Figure 4: Dwelling Sales Price Dwelling Rental Price This indicator shows mean rents as reported in bonds lodged with MBIE. It provides a snap shot of the rents and as such is the starting point for rental market analysis. As it captures rental figures stated on bond forms, usually lodged at the start of the tenancy, it does not capture subsequent rental increases and therefore usually understates the rent over the term of the tenancy. While important to note that rents, like house prices, invariably climb over the long term, strong and sustained growth in rents can suggest that housing supply is insufficient to meet demand. Median Gisborne rents have increased steadily since 2015. This may suggest a shortage in available housing. It may also reflect rising property prices and associated borrowing costs are being passed on to renters. The availability and affordability of rental properties in Gisborne will be a focus of further study as this impacts the most vulnerable members of our community. Figure 5: Dwelling Rental price 6
Ratio of Dwelling Sales Price to Rents This indicator reflects the relationship between median house prices and mean rents in the same geographical area. The greater the ratio, the greater the gap between renting and buying. So, in Gisborne, the average cost of buying a house in Wainui, is 30.8 times the average annual rent in Wainui. When considered over the last 20 years, and excluding luxury suburbs like Wainui, the gap between renting and buying has been relatively consistent for Gisborne. As with other indicators in this report, there is evidence of an upward trend beginning in early 2016. This indicator speaks to affordability issues. Future reporting will provide more comment upon how this trend develops and what subsequent investigation is necessary. Figure 6: Ratio of Dwelling Sales Price to Rents New Dwelling Consents Compared to New Household Growth This indicator provides a rough estimate of changes in demand and supply for new residential dwellings and the gap between the two. It does not account for external demand (investors and migration to the region) nor does it account for people living in shared accommodation who want to move into a separate dwelling. Both of these factors are likely relevant to the Gisborne market. To account for processing time, the consents data has also been lagged by six months to better align the curves. The relationship between district growth and new dwelling consents is not clear. It s reasonable to expect that population growth would be reflected, with some lag, in new residential construction. But according to the data, changes in population have little effect on the number of residential consents granted. For example, the large swings in district growth visible 2001 to 2005 produce no commensurate movement in consents. No single cause so far identified can account for this. It is possible that some capacity is available in existing housing stock, and uptake of this is preceding new dwelling construction. Similarly, high construction costs could also be dampening desire for new builds and finally a lack of development capacity could be constraining new home construction. This will be a key focus of investigation for the Housing and Business Assessment due later in 2018. 7
Figure 7: New Dwelling Consents Compared to New Household Growth HAM Buy The Housing Affordability Measures (HAM) are an experimental series. For potential home owning households, HAM Buy calculates what their remaining income would be after housing costs if there were to buy a modest first home in their current residential area. Households are then classified as being either above or below a 2013 National Affordability Benchmark. A higher number on the chart indicates a lower level of affordability, as it indicates more households fall below the the affordability benchmark. This measure appears to show improvement in housing affordability for new home buyers. The percentage of first home buyer households, who could not comfortably afford to buy a house in their area, lowered from 91% in 2007 to 81% in in 2016. Figure 8: HAM Buy (Share of Home-buyer Households with Below Average Income after Housing Costs) 8
HAM Rent HAM Rent reflects how much money is left over after paying rent for an appropriately sized dwelling in the area in which they currently live. As with HAM buy above, a higher number on the chart indicates a lower level of affordability. From the most recent peak of 80.2% in 2011, the percentage of renting households with below average income after housing costs has lowered to 76.2%. This is perhaps reflective of stronger wage growth since 2015 coupled with the fact median rents have only increased 8.6% over the same period. Figure 9: HAM Rent (Share of Renting Households with Below Average Income after Housing Costs) Land Value as a Percentage of Capital Value This indicator is only updated every three years as the data is acquired through ratings revaluations. The movements in this indicator signal shifts in land value as a percentage of total capital value. The trend from 2006 to the present has been one of rising property values. With that, both land values and construction costs have increased. However construction cost increases have surpassed land value increases, so the share of a property s worth attributable to the land value has steadily declined. This broadly suggests that it is construction costs rather than land scarcity that is driving house prices. This indicator contradicts the Price Cost Ratio below, which appears to suggest that land value, as a share of new build costs is rising. It seems doubtful that both are accurate. MBIE has been approached for further guidance. 9
Figure 10: Land Value as a Percentage of Capital Value Price Cost Ratio This indicator measures the extent to which land costs contribute to housing affordability. The percentage of land costs within the sales price of a property can signal the supply of land in that area. Therefore if land is more than one third the total purchase price, a shortage of land may be contributing to higher house prices and it s possible that a lack of development capacity is contributing to land scarcity and to increased housing prices. The Price Cost Ratio shows land accounts for a smaller portion of property value over time. However there is a spike in the price cost ratio from 2016 onwards. This contradicts information from other indicators. MBIE been approached for guidance. Regardless of the discrepancy between the two measures, more data will be needed to determine whether this signals simply stronger demand or is more indicative of an underlying constraint in development capacity. Figure 11: Price-Cost Ratio 10
Figure 12: Further explanation of the Price Cost Ratio Corelogic Buyer Classification: Nationwide Picture This graphic has been included as it presents data that may speak to the current housing shortage in Gisborne. The increase in multiple property owners is a nationwide trend that received some media attention when the Stocktake of New Zealand Housing was released in January 2018. The stocktake described a significant change in New Zealand home ownership habits where once older home owners would have sold one home to purchase the next, returning the first home to the market for younger first home buyers, those same owners are now more likely to retain both homes, one to occupy and one as an investment. This leaves fewer homes available for a larger number of buyers, potentially contributing to rising house prices and rents. Figure 13: Corelogic Buyer Classification: Nationwide Picture 11
Conclusion This is the first report of many. Its purpose is to provide some context and set a baseline for trends to be identified in future reports. It highlights areas for further study. The report has identified the following: there is a disconnect between new household growth and new dwelling consents there is a steady decline in housing affordability and the pace at which rising construction costs appear to have overtaken rising land costs. This report has demonstrated the gaps in our understanding, where more data and more practical investigation is necessary. Housing occupancy and commercial consents both require further development as does the conflicting figures provided by the Land Value as a Percentage of Capital Value and the Price Cost ratio measures. Similarly his report has not covered Industrial vacancy as there is no readily available data in this space and significant resource will be needed to capture and analyse such information in the future. It is expected that through further investigation alongside advice and guidance from MBIE that future reports will go further in addressing the questions highlighted here. 12