February 05, 2019

Building consents over two decades

Total annual residential building consents at all-time high, driven largely by low interest rates.

Total residential building consents issued were 32,996 for the year ended December 2018. This article looks at the recovery to the highs of 2004 where we saw 31,423 residential building consents issued. And explores the last twenty years of data.

It appears residential building consents were relatively steady up until 2001 then increased sharply going into 2004. There does not appear to be a ready explanation for the drop post-2004 aside from it coinciding with a period where net annual immigration turned negative. Whatever economic forces conspired to turn net immigration negative at this point could also have led to a decrease in building consents issued.

Digging a bit deeper, we know the last twenty years in particular have been marked by a series of economic crises which sparked a monetary policy response to increase the money supply and push down interest rates. To untangle some insight I have graphed the building consent data along with mortgage rate data. We can see that when mortgage rates increase (decrease) building consents decrease (increase). With mortgage rates being 6 percent and below since 2009 it makes sense that building consents have surged for the last 8 years. Quite simply, it appears profitable for people to build in such an environment.

And, just for fun we can compare the last twenty years of building consent data in New Zealand to similar Australian data. The Australian data has a comparable spike in 1999 – 2000 coinciding with the dot-com boom and bust and subsequent monetary easing. But it does not exhibit a large drop post-2004. This lends some weight to my hypothesis that whatever caused the net immigration at this time to turn negative was confined to New Zealand.

The Australian data also exhibits a significant drop post-2015 which New Zealand does not. This drop is interesting as there appears to be no ready explanation for it. Perhaps it is a market correction from the unsustainable highs of 2015.