Housing demand calculation methodology

[Memphis Turnkey Property]

It's more like 100 years the market has doubled on average every ten years (including inflation of course). That in itself is a good indicator of the future. Unless we become a dictatorship or suffer a catastrophic event like CHCH did.
Why do you want it to be different? What is your concern?

[Chris W]

Memphis Turkey

Here's some maths regarding property prices in Auckland doubling every 10 years. It is simply unsustainable for the next 100 years.

https://www.propertytalk.com/forum/showthread.php?2738-Ron-Hoy-Fong-Will-The-Next-Boom-Be-The-Boom-Of-All-Booms&p=423059&highlight=#post423059

[Memphis Turnkey Property]

Chris that assumes that rents, incomes and values will develop in the same ratio, which is a reasonable assumption but may not be the case. And why are you concerned about it given it is an unlikely issue in your life time and more than likely to never occur?
Also and perhaps most importantly, once you strip out inflation, house prices are not high at all in Auckland now or historically.

[Bob Kane]

Memphis Turkey

Here's some maths regarding property prices in Auckland doubling every 10 years. It is simply unsustainable for the next 100 years.

https://www.propertytalk.com/forum/s...ht=#post423059

People were saying similar back in 2004 - 'no way would Ak house prices double in 10 years.'
They said it again in 2010.
And again in 2017.

[Chris W]

How you can have a housing shortage and a fall in property prices at the same time.


Here is an article which calculates the housing shortage in Auckland.

Note that this is underlying demand for housing in Auckland. Factors which impact effective demand (on which the market prices of residential dwellings are based) are not accounted for.

Note that for the basis of this calculation for the housing shortage for underlying demand, no adjustment is made for changes in demand due to changes in house prices.

The calculation of underlying demand is used for the purposes of long term town planning, and infrastructure needs (such as sewerage, parks, roads, schools, etc) due to an increasing population. Underlying demand is not useful for estimating future property market prices.

For example, the housing shortage number calculated for underlying demand would remain unchanged in the following 2 extreme situations, (assuming current household incomes, & population).

1) if the current median house price in Auckland was $10,000. In this case there would likely be a huge increase in the number of active property buyers which would increase effective demand (and would be above underlying demand). People who were not owner occupiers would buy at this price. A large number of people who are already owner occupiers would also become active buyers and buy at this price - buy a house for their children, grandchildren, parents, holiday homes for out of towners, etc as they are cheap. People who could afford it from all over New Zealand and abroad (such as Australians and Singaporeans who are exempt from the foreign buying rules, and New Zealanders living overseas), are likely to become active buyers in the market. The underlying demand calculation does not incorporate this.

2) if the current median house price in Auckland was $10,000,000. In this case, there would likely be fewer active property buyers in the market. The number of effective demand would be fewer than that for underlying demand. The underlying demand as calculated above would remain unchanged - after all there is no change to population estimates or the assumption of the number of people living in each house. There would still be a "housing shortage" as calculated by economists using the population numbers, but in reality there would be few buyers active in the market if the median house price in Auckland was $10,000,000. Very few would have the deposit necessary to buy, and very few would meet the bank lending criteria particularly on debt servicing.

This is the reason why the underlying housing shortage is a misleading number (as calculated by economists, etc, and quoted by mainstream media, politicians, property market commentators, etc) as a justification for future house prices to continue rising. It is used as a convenient justification by those in the real estate industry to persuade those to enter the residential real estate market.

Economists in their calculations of the underlying housing shortage, and talking about future property market prices, have failed to incorporate the fact that:
1) as prices rise, effective demand falls
2) as prices fall, effective demand falls.

This is introductory economics and the basics of demand. Underlying demand is unchanged, yet effective demand changes. This is how there can be a housing shortage (due to underlying demand), yet property prices fall (due to an imbalance between effective supply and effective demand).

So when talking about a housing shortage, there are two numbers to understand for their own specific purposes:

1) Level one supply and demand - this is underlying supply and demand - this is the most commonly referred to and discussed by most property market commentators, media, politicians, etc. This is useful for long term town planning purposes for local councils to determine infrastructure needs.
2) Level two supply and demand - this is effective supply and demand - and this is the key determinant of property market prices - and this is how property markets can go from being a buyers market to a sellers market (and vice versa).


In Auckland, there is however a shortage of affordable housing which is an entirely different issue from the housing shortage referred to above.

https://www.interest.co.nz/property/97023/new-figures-show-aucklands-housing-shortage-still-getting-worse-should-start-decline?fbclid=IwAR2H1x7PVifOioKN6ZFhv4i0nRg54f691geYUzfJmtqWD8ik0ssvxjjFJFA

New figures show Auckland's housing shortage is still getting worse but should start to decline in the next one to two years

November 25, 2018

An accumulated housing shortage of more than 34,000 homes has built up in Auckland over the last five years, according to the latest calculations by interest.co.nz.


Every year interest.co.nz estimates the Auckland region's housing shortage by comparing its population growth from both the natural increase in the region's population (the excess of births over deaths) and the net gain from migration (from both overseas and within New Zealand), and estimates how many additional dwellings would be required to house the extra people, based on average household occupancy.
Until now, that figure has been compared to the number of new dwelling consents issued in the region to estimate the shortfall.
When those figures were last calculated in October, it suggested a shortfall of 19,908 dwellings had accumulated over the five years to June 2018.
We have now updated those figures and instead of using building consent figures to calculate the supply of new dwellings have replaced them with the number of Code Compliance Certificates (CCCs) issued for new dwellings by Auckland Council.
This gives a much more up to date picture of the supply of new housing because it is typically around one to two years from the time a building consent is issued until a new home is completed, but CCCs are generally issued about the time a dwelling becomes ready for occupation.
Those figures are displayed in the table below and they make for grim reading.
The CCC figures suggest a housing shortfall of just over 34,000 dwellings accumulated in Auckland over the five years to the end of June, an increase of 72% on the shortfall of 19,908 suggested by the building consent figures.
This would help explain why the Auckland housing market has remained reasonably resilient, both in terms of prices and rents, even though housing sales have declined and the market has cooled over the last couple of years.
However there is also some good news in the figures because they show that while Auckland's population is still growing at a faster rate than homes are being built to house the extra people, the rate at which new homes are being built is increasing while the rate of population growth is declining.
As the table below shows, over the five years to June 2018, Auckland's annual population growth peaked at 44,300 in the year to June 2016 and has since declined steadily to 38,600 in the 12 months to June this year.


Over the same period the number of CCCs issued each year has more than doubled, rising from 4322 in the 12 months to June 2014 to 9433 in the 12 months to June 2018.


That means that the housing shortfall being created each year peaked at 8919 homes in the 12 months to June 2015, and has declined sharply to 3434 in the 12 months to June this year.


So although Auckland's housing shortage is still increasing, the point at which supply starts to match demand is certainly on the horizon.
And that's where building consents become useful because they are a pointer to future housing supply, and they show that 12,369 new dwellings were consented in the 12 months to June this year, just shy of the estimated 12,867 needed to match population growth.
If present trends continue, and migration continues to slow and housing supply continues to increase, then it is possible that the supply of new homes in Auckland will start to outstrip population growth sometime in the next one to two years.
However there will still be a substantial shortfall to address before demand and supply get properly back into balance.
But in the meantime the numbers are certainly heading in the right direction.

Auckland's Growing Housing Shortage - Year to June 2014-2018
Year to June	*Natural increase in population	*Increase from net migration	*Total Increase in population	Estimated no. of new dwellings needed	No. of new dwellings completed (CCCs issued)	Annual housing shortfall	Cumulative housing shortfall
2014	14,200	19,600	33,800	11,266	4322	6944	6944
2015	13,900	29,100	43,000	14,333	5414	8919	15,863
2016	13,500	30,800	44,300	14,766	6730	8036	23,899
2017	13,800	28,900	42,700	14,233	7416	6817	30,716
2018	13,000	25,600**	38,600	12,867	9433	3434	34,150

*Source: Provisional figures from Statistics NZ **Adjusted for rounding. CCCs = Code Compliance Certificates issued for new dwellings by Auckland Council

Source: https://www.interest.co.nz/property/...8ik0ssvxjjFJFA

[Chris W]

Update on level 1 supply and demand housing shortfall (i.e shortfall in underlying demand and supply of housing) in Auckland as calculated by Greg Ninness of interest.co.nz

New estimates showing much lower levels of migration have probably reduced the size of Auckland's housing shortage but it hasn't gone away


By Greg Ninness
A change in the way long term migration is measured has resulted in a sharp decline in the estimates of how many migrants are settling in New Zealand.


And with fewer people coming here to live, it has also cast doubt on the extent of the housing shortage, particularly in Auckland where housing pressures from migration-driven population growth have been greatest.


While it would be nice to think that Auckland's housing shortage was nothing more than an urban myth, a close look at the new numbers suggests otherwise.


The new, lower migration figures suggest that Auckland's housing shortage may not be as severe as previously thought, but it is still likely to be substantial.


Interest.co.nz has been estimating the size of Auckland's housing shortage for several years, based on the natural increase in the region's population (the excess of births over deaths), the net gain from migration (the excess of long term arrivals over long term departures), average household occupancy and the number of Code Compliance Certificates issued for new dwellings in the region each year.


That data is summarised in Table 1 below, which shows that over the four years from 2015 to 2018, an accumulated shortfall of 27,206 homes built up in the Auckland region, which suggests the total shortfall would be much higher.


However Statistics NZ has revised the way it collects migration data, and this has shown a big drop in the number of people settling in this country on a permanent or long term basis, compared to the previous method.


The differences are summarised in Table 2 below, which shows that under the old system, Statistics NZ estimated a net migration gain of 58,259 people in the 12 months to June 2015, but under the new system, that figure was revised down to 53,208, which means 5051 fewer people (-8.7%) settled here than originally thought.

Table 2 NZ's Net Migration Gain
Old Statistics NZ estimates compared to new estimates
Year to June	Old estimate	New estimate	Difference	% Change
2015	58,259	53,208	-5051	-8.7%
2016	69,090	63,773	-5317	-7.7%
2017	72,305	58,625	-13,680	-18.9%
2018	64,995	46,634	-18,361	-28.2%

As the table shows, that variation got greater each year. In the 12 months to June 2018, the old system showed a net gain of 64,995 compared to just 46,634 under the new system, or 18,361 fewer long term migrants (-28.2%) under the new system.


That would almost certainly have reduced the size of Auckland's housing shortage, but by how much?


Unfortunately the revised migration data is only available at the national level and the regional data still in the pipeline.


However we can get a rough idea of how the Auckland numbers might be affected by reducing them by the same percentage changes that applied to the national figures.


In other words, because the national net gain from migration was 28.2% lower under the new system compared to the old one for the 12 months to June 2018, we'll assume the Auckland figures were reduced by the same amount.


That produces a rough measure, but at the moment it's the best we have.


Table 3 below shows the effect those rough estimates would have had on the calculations for Auckland's housing shortfall from 2015 to 2018 (June years).


In the year to June 2015, the housing shortfall declined from 8919 under the old system, to 8075 under the new system and the following year it declined from 8036 to 7246.


The differences were even more apparent over the next two years, with the shortfall for 2017 dropping from 6817 under the old system to 4996 under the new system, and in 2018 it dropped from 3434 to just 1027.


By that measure, the accumulated housing shortfall that built up in Auckland over the four June years from 2015 to 2018 would have declined from 27,206 under Statistics NZ's old system of migration measurement, to 21,314 under the new system (-21.7%).


So Auckland's housing shortage has not gone away, it's probably just around 20% smaller than we thought.


What's even more interesting are the trends that the figures highlight.


Both sets of numbers show that the net gain from migration has been slowing while Code Compliance Certificate issuance has been increasing.


As a result, the annual shortfall has been decreasing and the new figures show that for the year to June 2018, the annual shortfall was just over a thousand homes.


Given that the figures are now more than six months old, and that in the second half of last year the net migration gain continued to decline (whatever system was used for the calculations), it is quite likely that Auckland's housing shortage has flattened out and may even be starting to decline.


That doesn't mean a surplus of homes is is likely to appear over the horizon any time soon, because the accumulated shortfall will keep the Auckland housing market extremely tight for some time.


But at the least it shouldn't be getting any worse and pressures may even be starting to ease.


Although our calculations are just rough estimates, they should be reliable enough to give an indication of the broad trends in the Auckland housing market.


And we'll continue to update our figures as more reliable data comes to hand.

Table 1. Auckland's Growing Housing Shortage - Year to June 2015-2018 Based on Statistics NZ's Original Estimates (Old format)
Year to June	Natural increase in population	Increase from net migration	Total Increase in population	Estimated no. of new dwellings needed	No. of new dwellings completed (CCCs issued)	Annual housing shortfall	Cumulative housing shortfall
2015	13,900	29,100	43,000	14,333	5414	8919	8919
2016	13,500	30,800	44,300	14,766	6730	8036	16,955
2017	13,800	28,900	42,700	14,233	7416	6817	23,772
2018	13,000	25,600**	38,600	12,867	9433	3434	27,206

Table 3. Auckland's Growing Housing Shortage - Year to June 2015-2018 Based on Statistics NZ's Revised Estimates (New format)
Year to June	Natural increase in population	Increase from net migration	Total Increase in population	Estimated no. of new dwellings needed	No. of new dwellings completed (CCCs issued)	Annual housing shortfall	Cumulative housing shortfall
2015	13,900	26,568	40,468	13,489	5414	8075	8075
2016	13,500	28,428	41,928	13,976	6730	7246	15,321
2017	13,800	23,438	37,238	12,412	7416	4996	20,317
2018	13,000	18,381	31,381	10,460	9433	1027	21,314

Source: https://www.interest.co.nz/property/...y-reduced-size

[Chris W]

Correction, since unable to edit:

1) as prices rise, effective demand falls
2) as prices fall, effective demand RISES.

How you can have a housing shortage and a fall in property prices at the same time.


Here is an article which calculates the housing shortage in Auckland.

Note that this is underlying demand for housing in Auckland. Factors which impact effective demand (on which the market prices of residential dwellings are based) are not accounted for.

Note that for the basis of this calculation for the housing shortage for underlying demand, no adjustment is made for changes in demand due to changes in house prices.

The calculation of underlying demand is used for the purposes of long term town planning, and infrastructure needs (such as sewerage, parks, roads, schools, etc) due to an increasing population. Underlying demand is not useful for estimating future property market prices.

For example, the housing shortage number calculated for underlying demand would remain unchanged in the following 2 extreme situations, (assuming current household incomes, & population).

1) if the current median house price in Auckland was $10,000. In this case there would likely be a huge increase in the number of active property buyers which would increase effective demand (and would be above underlying demand). People who were not owner occupiers would buy at this price. A large number of people who are already owner occupiers would also become active buyers and buy at this price - buy a house for their children, grandchildren, parents, holiday homes for out of towners, etc as they are cheap. People who could afford it from all over New Zealand and abroad (such as Australians and Singaporeans who are exempt from the foreign buying rules, and New Zealanders living overseas), are likely to become active buyers in the market. The underlying demand calculation does not incorporate this.

2) if the current median house price in Auckland was $10,000,000. In this case, there would likely be fewer active property buyers in the market. The number of effective demand would be fewer than that for underlying demand. The underlying demand as calculated above would remain unchanged - after all there is no change to population estimates or the assumption of the number of people living in each house. There would still be a "housing shortage" as calculated by economists using the population numbers, but in reality there would be few buyers active in the market if the median house price in Auckland was $10,000,000. Very few would have the deposit necessary to buy, and very few would meet the bank lending criteria particularly on debt servicing.

This is the reason why the underlying housing shortage is a misleading number (as calculated by economists, etc, and quoted by mainstream media, politicians, property market commentators, etc) as a justification for future house prices to continue rising. It is used as a convenient justification by those in the real estate industry to persuade those to enter the residential real estate market.

Economists in their calculations of the underlying housing shortage, and talking about future property market prices, have failed to incorporate the fact that:
1) as prices rise, effective demand falls
2) as prices fall, effective demand falls.

This is introductory economics and the basics of demand. Underlying demand is unchanged, yet effective demand changes. This is how there can be a housing shortage (due to underlying demand), yet property prices fall (due to an imbalance between effective supply and effective demand).

So when talking about a housing shortage, there are two numbers to understand for their own specific purposes:

1) Level one supply and demand - this is underlying supply and demand - this is the most commonly referred to and discussed by most property market commentators, media, politicians, etc. This is useful for long term town planning purposes for local councils to determine infrastructure needs.
2) Level two supply and demand - this is effective supply and demand - and this is the key determinant of property market prices - and this is how property markets can go from being a buyers market to a sellers market (and vice versa).


In Auckland, there is however a shortage of affordable housing which is an entirely different issue from the housing shortage referred to above.

https://www.interest.co.nz/property/97023/new-figures-show-aucklands-housing-shortage-still-getting-worse-should-start-decline?fbclid=IwAR2H1x7PVifOioKN6ZFhv4i0nRg54f691geYUzfJmtqWD8ik0ssvxjjFJFA

New figures show Auckland's housing shortage is still getting worse but should start to decline in the next one to two years

November 25, 2018

An accumulated housing shortage of more than 34,000 homes has built up in Auckland over the last five years, according to the latest calculations by interest.co.nz.


Every year interest.co.nz estimates the Auckland region's housing shortage by comparing its population growth from both the natural increase in the region's population (the excess of births over deaths) and the net gain from migration (from both overseas and within New Zealand), and estimates how many additional dwellings would be required to house the extra people, based on average household occupancy.
Until now, that figure has been compared to the number of new dwelling consents issued in the region to estimate the shortfall.
When those figures were last calculated in October, it suggested a shortfall of 19,908 dwellings had accumulated over the five years to June 2018.
We have now updated those figures and instead of using building consent figures to calculate the supply of new dwellings have replaced them with the number of Code Compliance Certificates (CCCs) issued for new dwellings by Auckland Council.
This gives a much more up to date picture of the supply of new housing because it is typically around one to two years from the time a building consent is issued until a new home is completed, but CCCs are generally issued about the time a dwelling becomes ready for occupation.
Those figures are displayed in the table below and they make for grim reading.
The CCC figures suggest a housing shortfall of just over 34,000 dwellings accumulated in Auckland over the five years to the end of June, an increase of 72% on the shortfall of 19,908 suggested by the building consent figures.
This would help explain why the Auckland housing market has remained reasonably resilient, both in terms of prices and rents, even though housing sales have declined and the market has cooled over the last couple of years.
However there is also some good news in the figures because they show that while Auckland's population is still growing at a faster rate than homes are being built to house the extra people, the rate at which new homes are being built is increasing while the rate of population growth is declining.
As the table below shows, over the five years to June 2018, Auckland's annual population growth peaked at 44,300 in the year to June 2016 and has since declined steadily to 38,600 in the 12 months to June this year.


Over the same period the number of CCCs issued each year has more than doubled, rising from 4322 in the 12 months to June 2014 to 9433 in the 12 months to June 2018.


That means that the housing shortfall being created each year peaked at 8919 homes in the 12 months to June 2015, and has declined sharply to 3434 in the 12 months to June this year.


So although Auckland's housing shortage is still increasing, the point at which supply starts to match demand is certainly on the horizon.
And that's where building consents become useful because they are a pointer to future housing supply, and they show that 12,369 new dwellings were consented in the 12 months to June this year, just shy of the estimated 12,867 needed to match population growth.
If present trends continue, and migration continues to slow and housing supply continues to increase, then it is possible that the supply of new homes in Auckland will start to outstrip population growth sometime in the next one to two years.
However there will still be a substantial shortfall to address before demand and supply get properly back into balance.
But in the meantime the numbers are certainly heading in the right direction.

Auckland's Growing Housing Shortage - Year to June 2014-2018
Year to June	*Natural increase in population	*Increase from net migration	*Total Increase in population	Estimated no. of new dwellings needed	No. of new dwellings completed (CCCs issued)	Annual housing shortfall	Cumulative housing shortfall
2014	14,200	19,600	33,800	11,266	4322	6944	6944
2015	13,900	29,100	43,000	14,333	5414	8919	15,863
2016	13,500	30,800	44,300	14,766	6730	8036	23,899
2017	13,800	28,900	42,700	14,233	7416	6817	30,716
2018	13,000	25,600**	38,600	12,867	9433	3434	34,150

*Source: Provisional figures from Statistics NZ **Adjusted for rounding. CCCs = Code Compliance Certificates issued for new dwellings by Auckland Council

Source: https://www.interest.co.nz/property/...8ik0ssvxjjFJFA

[Chris W]

An example of using underlying demand shortage to support the notion that house prices will not fall by much in Auckland

OneRoof editor Owen Vaughan said: "The latest REINZ figures and data from OneRoof / Valocity released earlier this month suggest that the hesitation that was evident in the market early last year is starting to take hold.

"The reality is that Auckland's market is soft and will continue to be until pressure for more housing reaches a point that triggers a new surge in values.

"It's highly unlikely the country's biggest housing market will suffer a house price collapse such as experienced Sydney and Melbourne. An undersupply of residential housing and strong demand support current values and future growth.

Source: https://www.nzherald.co.nz/business/...ectid=12203686

[Chris W]

Auckland Council's chief economist using shortage of 46,000 dwellings (using underlying demand) to support the notion that property prices in Auckland will not fall like those being experienced in Sydney and Melbourne.

The downturn in the Australian housing market is being closely followed on this side of the Tasman, with many people believing Auckland's housing market will follow the Australian market and head into a slump next year.


However Auckland Council's chief economist David Norman doesn't think so.


In a LinkedIn post, Norman said Auckland's housing market was unlikely to follow trends in Sydney and Melbourne.


"Suggestions that the Auckland housing market will follow those of the Australian eastern seaboard seem baseless," he said.


"Sydney and Melbourne are in a very different position, having not systematically under-built the way Auckland did, and thus having no significant shortfall.


"Auckland's shortfall is around 46,000 dwellings.


"Our trans-Tasman cousins' two largest cities have an oversupply of apartments, largely the result of building for the foreign investor market that is not as buoyant any more (the way Auckland overbuilt for overseas students in the early 2000s).

Source: https://www.interest.co.nz/property/...-shortage-will