Why two-bedroom apartments are at their cheapest for years, plus three other insights from Residential Advantage 2021
29 Jun 2021
Featuring CBRE’s Zoltan Moricz and Tamba Carleton, The Urban Advisory’s Dr Natalie Allen, and infrastructure and policy specialist Hamish Glenn, this standing-room-only event at the ANZ Centre provided an overview of current market dynamics and offered insights and solutions to the many residential demand and supply challenges facing developers, funders, and government agencies.
Four key insights from the event revealed that:
- Off-the-plan apartment pre-sales have tripled since the end of 2018, and the weighted average two-bedroom apartment price is now at its lowest since 2014 – at $860,000, down $240,000 from the high of $1.1million in 2017 – largely due to reduced unit sizes and increased use of the walkup methodology. That said, the need for apartments at the cheaper end of the scale is greater than ever.
- House price appreciation hasn't significantly lifted demand at the low end of pricing, but it has lifted it at higher end of pricing. This allows some element of offset in projects with a wide range of unit prices.
- New Zealand’s infrastructure lag is the missing link in the New Zealand productivity paradox, helping to explain why the cost of land and housing is so high. Reforms are coming at us in many areas, but will they improve outcomes or cause greater issues that already exist?
- We need to get creative to change our thinking on housing and increase tenure diversity. If we wish to change our current trajectory of a growing rental market, growing numbers of stressed renters and owners, growing intergenerational inequality, and ageing housing stock.
Why off-the-plan apartment pre-sales have tripled since the end of 2018
The two most recent quarters had more pre-sales than all four quarters in 2019 combined. As pre-sale volumes tend to follow general housing market activity and price growth, this creates a more positive environment for developers.
For the first time ever, off-plan apartment prices are cheaper than existing housing in Auckland.
Since Covid-19 we have seen a 30% escalation in house prices, which has created a new environment for the apartment market. Suddenly apartments are a lot more price competitive. As the pipeline currently stands, apartments are the most price-competitive they have been this cycle, due to two main factors:
- Reduced unit size. During the difficult years in attracting presales (2017-2019), units became smaller/more compact, and this may have reached its bottom limit although there is no set minimum size.
- The walkup apartment construction methodology. This has helped with buyer affordability and therefore project feasibility. Walkup apartment buildings, 2-3 storeys of single level apartments where residents walk up one or two flights of stairs to their units, are less complex to build and do not incur additional costs related to sprinkler systems and elevators, which are mandatory for buildings of 4+ levels in height. Walkup launches have increased in each of the five years to 2020 at the same time as high-rise projects have fallen away.
One of the drivers of this is increased collaboration between private developers and the Kiwibuild unit. Underwrite of units that meet the Kiwibuild price caps has enabled developers to proceed with construction in tandem with sell-down, rather than waiting for presale threshold to be met. This helps projects with price capped units reach completion faster than average.
This means that the weighted average two-bedroom apartment price is now at its lowest since 2014. It now averages $860,000, which is only around $200,000 more than 2014, when land was cheaper, and is $240,000 lower than the peak of 2017.
2021 isn’t seeing larger numbers of apartment project launches than in the past 2-3 years, despite price-competitiveness compared to housing. At this stage it looks unlikely that 2021 project launches will be significantly in excess of 2019 or 2020. Even in the suburban market 2021 doesn’t look particularly strong, and it doesn’t look like that the momentum will be sustained.
The need for apartments at the cheaper end of the scale is greater than ever, as they offer a genuinely cost-effective option for home buyers. Underlying effective demand for $600k apartments is about 70,000 Auckland households. Demand then drops away significantly at higher price points, more than halving by the time pricing reaches $1 million.
First home buyers might be willing to buy, but the product is still not actually affordable, which is restraining demand - unless it can be unlocked with these cheaper apartment projects: scale, construction efficiency, walk up, well located so lesser need for carparks etc.
The group that has benefited most from the relative price changes of houses and apartments are those already on the housing ladder. While house price appreciation hasn't significantly lifted demand at the low end of pricing, it has lifted it at higher end of pricing. This provides greater feasibility to develop higher intensity mid- and high-rise typologies.
In turn, this creates opportunities for the provision of a wider range of housing solutions, providing diversity in product and tenure types as more expensive dwelling typologies can work with - and more effectively cross-subsidise - other forms of housing within a wider scope of development.
But, as CBRE’s analysis of the history of project successes and failures shows, developers need to be careful that they build to effective demand, the right product, at the right place, at the right price.
What is effective demand?
One of the big challenges facing developers is an accurate understanding of the nature and quantum of demand for their apartment development projects. To address this, CBRE Research spent considerable time and effort on developing a methodology to understand and quantify effective demand.
Effective demand is different from someone just wanting something. It is a unique tool offered by CBRE to help developers to know what to build: the right product, in the right place, and at the right price, by understanding:
The quantum of apartment demand, of different typologies, at different price points at a fine-grained geographic level, based on:
- The size and concentration of different socio economic and demographic sub-groups
- Their desire for apartments as a dwelling typology
- Their needs/wants for different apartment typologies
- Their willingness to buy apartments rather than another dwelling type, and
- Their ability to buy.
New Zealand’s infrastructure lag is the missing link in the New Zealand productivity paradox
We have a great country by many measures, but our productivity, environmental performance and inequality are declining against many metrics, even as household wealth rises. Land values have risen largely because we haven’t invested in infrastructure.When you add up what it costs to fix the infrastructure around New Zealand, regional water providers outside Auckland will see significant cost increases, and the government is thinking about shifting these costs locally.
However, Government has to think about costs nationally when it comes to transport, announcing a $6.8bn national programme plus the shovel-ready programme. As Councils deliver half of all transport, revenue will likely come from e.g. road pricing, fuel taxes etc. Two concerns are: 1) plans may be rolled out only to be dumped a couple of years later, and 2) it doesn’t respond to the growth challenge.
The New Growth Funding and Financing Act allows off-balance sheet borrowing, capturing rates to borrow, based off a US model. It should enable us to be looser with development restrictions, but as it is complex it hasn’t been used, and it requires ministerial sign-off.
The RMA is being reformed, but the structure that might replace it could be worse, due to the proposed separation of strategic planning and land use planning. Further, there has been no discussion yet about how infrastructure would be funded and financed under the new plan.
We need to rethink housing demand and housing tenure diversity
As understanding of health and wellbeing in housing grows in New Zealand, wellbeing outcomes, indicators, frameworks and measures are being included in the housing debate: this is how projects are being increasingly judged.
This thinking is now turning to the neighbourhood scale – it is no longer just about creating suburbs with houses. The language is changing to focus on delivering mixed use communities, requiring councils to understand them.
Six focus areas are helping to provide homes to meet people’s needs. This is becoming an increasing obligation if developers want to get a project across the line, as it provides much more opportunity to enable people to engage in the market.
Our current trajectory is a perfect storm:
- Increasing rental market
- Growing numbers of stressed renters and owners
- Growing intergenerational inequality
- Ageing housing stock
Statistics show the trends are towards less ownership, but the income required to rent is rising. Do we want to be able to provide opportunities for our kids, teachers, students, and nurses etc? We have to come up with new ways to help people of all types live in our city.
We need to rethink demand. Traditional processes lead to a development yield. Moving to a more dynamic model and including qualitative data will lead to more of a precinct delivery model, the best fit for the people you’re trying to serve.
To drive affordability we need more models, such as supported rental, rent to buy, build-to-rent, co-living models, co-housing, and shared equity models, and more. Rental cooperatives and equity cooperatives and community land trusts are growing strongly overseas. Community land trusts in particular take the land cost out of the equation.
What will change require? We need to ask different questions, take a systems view to understand the economic issues of the market, plus the social and cultural implications of our choices. Then make it about people and monitor and track our progress: critical to enable the government to unlock opportunities to help private sector.
We need to get creative.