Like new builds, alterations to residential buildings are starting to show hints of rising driven mainly by a large fall in interest rates, says Kiwi economist Rodney Dickens.
Upturns and downturns in housing alterations are generally reasonably in sync with those for new builds although, at times, different factors can impact on the two, resulting in different behaviour. For example, both experienced major upturns over 2021 and 2022 driven mainly by falling interest rates and both have experienced major falls since, driven mainly by rising interest rates. This is shown in the first chart using the annual values of consents.
The first chart also shows alterations hugely underperforming versus new builds since 2016. One factor was a growing proportion of alterations going ahead without consent, meaning consents underreported alteration activity.
More important was the mega boom in townhouse building, especially in Auckland, that started in 2018 and was driven by council policies and the Auckland Unitary Plan making it easier to convert existing dwellings into more intensive housing. It was also partly driven by a large increase in section prices that encouraged building smaller new dwellings, especially townhouses.
It takes some time for interest rates to impact on consents for alterations, so the upturn from the sizeable fall in interest rates still lies ahead. However, as I have discussed in the past for new builds, the upturn for alterations is also likely to be less than past upturns because of recent low population growth and existing dwelling sales not responding as strongly as normal to the fall in interest rates, with some link between people buying existing dwellings and making alterations.
There appeared to be a case for alteration activity to outperform new builds following the flooding in January 2023 and Cyclone Gabrielle in February 2023. Auckland and Hawkes Bay were two of the regions most impacted by these natural disasters and, at the time, there were expectations there would follow a sizeable boost to alteration activity. There were signs of outperformance by alteration consents in 2023, with them taking longer to start falling than consents for new builds, but this was too early for much of the disaster repair work to have reached consenting (see the first chart).
Unlike the Canterbury earthquakes in 2010 and 2011 that were followed by massive outperformance by local consents, there has been no sign of the number of Auckland and Hawkes Bay combined consents for alterations outperforming relative to the number of consents in the rest of New Zealand following the early-2023 disasters. It is hard to believe there weren’t significant repairs following the natural disasters, especially in Auckland and Hawkes Bay, so maybe unlike the post-earthquake repairs in Canterbury, the post-flooding and post-Gabrielle repairs went ahead largely without consents?
