Forget migration for a minute, the number of residents per Kiwi household is shrinking, placing greater pressure on existing housing supply. Bayleys explores the correlation between our changing living preferences and the potential for rising residential values.

While Kiwi eyes have been keenly focused on recent migration data, suspected to place greater demand on already under-pressure housing supply, our households are shrinking, meaning we need to create more homes to accommodate the same number of residents.

Research from independent economic consultancy Infometrics finds the average number of residents per dwelling in New Zealand is projected to steadily decline in the decade to 2031, requiring an estimated 29,000 additional homes.

And that’s not including the already widening housing deficit occurring in light of net migration, which was circa 72,300 in the year to June 2023 and economists expect has already delivered a shortfall of some 3,500 homes.

STRUCTURAL CHANGE

During the pandemic, our lifestyle preferences experienced a seismic shift, as the global health crisis and ensuing restrictions, fear of viral infections, economic uncertainty and social distancing beyond the household saw Kiwis blend their families in efforts to lessen the social and economic burden.

Fast forward two years to August 2022, and trends in New Zealand mirror those observed in Australia, where the increase in people per dwelling recorded during the pandemic abruptly reversed, reaching a historical low of 2.48 individuals per residence.

“This change coincides with increasing demands for space, as people informed by the pandemic experience sought freedom and room for themselves,” says Bayleys Real Estate’s General Manager of Residential Raymond Mountfort.

“Fundamental changes to the workplace environment and an emphasis on work-from-home facilities have also played a critical role in decreasing household numbers, with more individuals utilising bedrooms as home offices.

“At Bayleys, we saw this manifest in heightened demand for lifestyle properties on city fringes and the regions, areas which generally report smaller household numbers than urban centres like Auckland, Wellington and Christchurch.”

Modern societal changes are also playing critical roles in the desire by Kiwis to form smaller households, including an increasing ageing population, falling marriage rates, higher household incomes and fertility trends.

CYCLICAL CHANGE

Cyclical changes are also evident in recent housing preferences, as we saw the demonstrable effects on the rental market in the absence of tourists, temporary workers and international students. At the same time, border restrictions took effect during the pandemic.

When the population shrank over this period, it contributed to higher vacancy rates for rental properties, and in response, landlords lowered advertised rents.

This facilitated greater affordability and, in turn, encouraged individuals to form smaller households, encouraged further by high income growth.

“Residential property values relative to incomes have been amongst some of the highest in the developed world, and while they do remain extremely high – exemplified by values being nine times the average household income in Auckland – a recent cooling in the market has supported the value proposition for purchasers to get their first foot in the door.

“As a result, we have seen first home buyers grab an increasing proportion of the market’s share, with the latest mortgage lending data from the Reserve Bank of New Zealand (RBNZ) suggesting they accounted for 24 percent of all new mortgages written in May – the highest proportion since records began.

“Many of our young buyers have been scrimping and saving for their first home, often moving in with parents or extended family to save money on rising rents, so when they strike out on their own, there is an additional layer of pressure on existing housing supply as they’re splitting away from the traditional family residence.”

RBNZ mortgage lending data also revealed that the amount of funds advanced was up eight percent year-on-year - the most since the previous market peak of December 2021.

“This suggests that first-home buying activity is not only adding demand for homes at a time the construction pipeline is dwindling but also contributing to residential value growth,” Mountfort says.

With a view to longer-term house price stability, it becomes clear that residential construction needs to stay ahead of our shifting living preferences to cope with the additional pressures placed on supply from the formation of ‘new’ households.

In addition, new homes are required to account for those lost during the year’s extreme weather events, demolition and abandoned building consents, particularly given the current challenges facing the building and construction sector.

“While the current outlook is shaping up to see the supply and demand imbalance widen across the national housing stock, demand can be volatile, evidenced by economic conditions which can easily see a reversal of current trends.

“Despite this, our shifting living preferences are poised to be a critical factor influencing residential value growth in the years to come, with Kiwis willing and able to pay more for quality properties which meet their lifestyle demands.”