The rising cost of new dwellings is of concern to many in the industry, not just purchasers, but what factors are driving these increased costs?
There has been plenty of media attention given to the rising values of properties in NZ, and this is also being fuelled by a building boom, especially across Auckland, not seen since the mid 1970s. With the addition of new subdivisions and housing, these higher (on average) value properties are skewing values upwards, but we are also seeing significant changes in the way we live being reflected in the dwellings we build.
Firstly, building costs have increased at a pace greater than the inflation rate with Infometrics predicting residential building cost inflation to average 5.2 percent per annum through to 2019, greater than the Reserve Bank’s target inflation of 2 percent. This has been largely driven by a shortage of resources in the building sector following the Canterbury rebuild and an estimated 39 percent increase in new dwelling consents in the next two years. Associated services, such as Council permit fees, development charges, water connection fees and compliance costs have also contributed to higher costs for the new home-builder.
Secondly land availability, or more accurately the constraints on development imposed by Auckland Council’s Metropolitan Urban Limit (MUL), has inflated the cost of land due to scarcity of supply. This was identified by both the Reserve Bank in a report in December 2013 and by the NZ Initiative report by Michael Basset and Luke Malpass on How New Zealand Lost its Housing Affordability. Both reports were critical of Council’s use of the MUL to constrain development. For example between 2002 and 2012 section prices more than doubled across all of the greater Auckland region, yet within 25km of the inner city, land prices tripled.
The Unitary Plan encourages greater land use through intensification, subject to a number of controls, which should see some easing of land costs for new housing. However, acceptance of smaller sections may take longer as New Zealanders move away from the quarter acre dream. The additional pressure on Council services (such as water, sewerage, transport) will also be a determining factor as to just how successful this intensification will be in improving housing availability and affordability in Auckland.
Finally our lifestyle is changing the homes we build. In the 1900s the average dwelling size was around 130sqm, with one bathroom and three bedroom homes the norm, and even in the mid 1970s permits for houses greater than 140sqm were restricted in an effort to curb building resource shortages during the last building boom. Since the 1970s we’ve seen the average dwelling size increase to 205sqm in 2010 (QV data). Some of this increase can be attributed to minimum dwelling size covenants being applied to new subdivisions by developers to optimise land values. However many new houses today feature ensuites, walk in wardrobes, separate lounges or media rooms, internal double garaging, large open plan living areas, and kitchens with walk in pantries or sculleries. In the past, these features were considered “luxury” but they are now almost standard in new builds. Time will tell if the Unitary Plan will see a shift towards more compact living as section sizes decrease.