Residential construction and population growth in New Zealand 1996-2016

Introduction:

Between 1996 and 2016 Auckland’s population increased by 499,000, or by slightly more than the increase in the rest of New Zealand. Yet only half the number of building permits were issued in Auckland as in the rest of the country. To understand this difference, this paper uses regional data to investigate how population growth affects residential construction. It estimates that if Auckland had built houses at the same rate as the rest of the country (adjusted for population growth) it would have needed to have built an additional 40 – 55,000 dwellings during the period – and needed nearly 9000 more construction sector workers. The shortfall was modest until 2005, but sharply accelerated due to the cessation of apartment building in central Auckland. The results show the large increase in the average size of dwellings was not a major factor in Auckland’s shortfall relative to the rest of the country as new dwellings were smaller in Auckland than elsewhere.

Non-technical summary:

This paper aims to understand how population growth has affected building activity in New Zealand regions during the last twenty years. Using panel data regression techniques, we estimate that 0.25 – 0.30 additional houses are built for every additional person in a region. The additional 0.25 – 0.30 building permits per person equate to about 40 m2 of new construction, with a value of just over $60,000 in 2016 terms. This construction is in addition to the ‘background’ construction that occurs to replace old houses, which amounts to 2.5 – 3.0 dwellings per 1,000 people per year, or approximately 11,000 – 13,000 dwellings per year.

The estimates suggest Auckland’s construction shortfall between 1996 and 2016 was between 40,000 and 55,000 dwellings, or approximately 10 percent of Auckland’s housing stock. The estimates of the shortfall are fairly robust to changes in the specification of the models; moreover, they all suggest that the shortfall was modest until the end of 2005, after which it increased rapidly.

A Simple Model of Population Growth, Housing Stock and Building Activity:

This section develops a simple model to explore how building activity is affected by population growth and depreciation. Moreover, regression estimates will be biased as the residuals of the estimated equations will be correlated with the lags of the population variable. These problems are reduced by increasing the size of the period, for then most of the building activity associated with different sized shocks takes place within the period.

Models including lagged population growth:

For robustness purposes, we estimate the equation with one, two or three lags of population growth in addition to the contemporaneous period population growth. The coefficients on even longer lags were small and never significantly different from zero. The lagged models are estimated using annual data as well as data aggregated into two or four-year periods. As the coefficients on the lagged population growth variables in the models using one and two-year period data are positive and statistically significant, the total amount of building activity associated with population growth is larger than estimated in the one and two-year horizon period length models in table

Differences in New Housing Size Across Regions:

The average size of new dwellings in New Zealand increased from 133 m2 in 1990 to 191 m2 in 2016. This is a faster rate of increase than occurred in either Australia or the United States.13 In Auckland the fraction of newly constructed dwellings smaller than 150 m2 fell from 68 percent to 32 percent, while the fraction over 250m2 increased from 8 percent to 26 percent. These figures raise two questions: why did the size of new houses increase; and is the increased size of houses a major factor behind Auckland’s housing shortage? The answer to the first question is unclear, for the statistical evidence is not strong enough to untangle the relative importance of different factors.

Alternative measures of Auckland’s housing shortfall:

Did Auckland’s housing shortfall occur because builders in Auckland constructed unusually large houses over the period? There are several ways this question can be answered, all of which suggest the answer is “no”. But fundamentally, the average size of new houses in Auckland would be larger than those built in the rest of the country if Auckland had built unusually large houses. In fact, the average size of new Auckland houses was 6 m2 smaller than the average recorded in the rest of the country, 177 m2 versus 183 m2

Population change and the size of new houses:

How do population and demographic change affect the size of newly constructed houses? We use two approaches to explore the issue. First, we examine how the size of newly constructed houses varied with the population growth rate across regions, by comparing the size distribution of newly constructed houses in regions with positive population growth with the size distribution of newly constructed houses in the four regions with no population growth. Secondly, we use the variation in age structure across regions to see whether the age of new residents in a region affects the size of newly constructed houses.

Conclusion:

Using regional variation in population growth rates we have investigated how population growth affects residential construction across New Zealand regions. We find that an additional person in a region is associated with 0.25 new houses or $65,000 (2016 dollars) new construction including new consented alterations. Indeed, population growth is so strongly associated with construction activity that international and interregional migration may be hyper-expansionary, as the short run demand associated with each additional person is greater than their average level of output.

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