Auckland property and construction: 2021 ushers in the medium-density era, with growth accelerating in 2022
The Covid pandemic forced the world to reset its goals: any positive economic growth in 2020 was a 'miracle'; 2021 was a year of recovery compared with 2020; and in 2022, the third year since the outbreak, economic development began gradually returning to normal. What course will the economy take in the post-pandemic era?
The Covid pandemic forced the world to reset its goals: any positive economic growth in 2020 was a 'miracle'; 2021 was a year of recovery compared with 2020; and in 2022, the third year since the outbreak, economic development began gradually returning to normal. What course will the economy take in the post-pandemic era? In New Zealand, lockdown measures between March and April 2020 contributed to GDP recording its largest-ever annual fall in 2020, down 2.9%. Economic activity continued recovering in 2021, but uncertainty and inflationary pressures remained.
Yet in 2020, as the pandemic wreaked havoc and severely damaged New Zealand industries such as tourism, retail and education, the property market bucked the trend and construction boomed. Record housing construction even led to severe building material and labour shortages. In 2021, the property market became hotter still, with house prices soaring. A closer analysis of market data, however, reveals that 2021 had distinctive characteristics unlike previous property booms. The market's focus was on a relatively new housing type for New Zealand: medium-density property.
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2021，“The inaugural year of medium-density housing” begins
Since the pandemic began in 2020, medium-density property development, design, construction and sales have quietly become market favourites. As 70% of large projects were cancelled, medium-density housing even became a lifeline for construction.
In 2021, policy ensured that medium density remained a central theme. Auckland can be said to have entered the medium-density era, with 2021 deservedly marking its inaugural year for the city's property and construction industries:
The Auckland Unitary Plan, adopted in October 2016, was a revolutionary planning framework for Auckland's shift to medium density, ushering in extensive redevelopment of its established urban areas. Under the plan, Auckland would need 420,000 additional homes by 2041 to meet rapid population growth. Two-thirds would be within the existing urban area, with one-third extending into the urban fringe. In other words, many standalone homes in established neighbourhoods would be demolished and replaced by medium-density townhouses and low-rise apartments, making Auckland's neighbourhoods taller and denser.
After five years of the Unitary Plan, the medium-density era finally began against the unlikely backdrop of a pandemic. In 2021, building consents in Auckland covered 19000 homes, up 88% from the plan's early implementation five years earlier. Of those 19000 homes, 60% were medium- and high-density units such as apartments, townhouses and retirement village units. For the first time, medium- and high-density units outnumbered low-density construction represented by standalone homes.
In mid-October 2021, New Zealand's Labour government and the opposition National Party jointly announced new housing construction legislation, the Housing Supply Bill. It introduced a new concept, the Medium Density Residential Standards (MDRS), seen as supplementing the Unitary Plan and the National Policy Statement on Urban Development, NPS-UD. In many planning details, it went further than the Unitary Plan's existing Mixed Housing Urban Zone.
Both parties said their joint support for this radical new housing policy aimed to address New Zealand's worsening housing crisis by enabling at least 48200 to 105500 additional homes over the next 5 to 8 years. To achieve that vision, homes up to three storeys would be permitted on most residential sites in New Zealand's main cities from August 2022, without the expensive, cumbersome resource consent process. In effect, this would bring forward implementation of some previously proposed NPS-UD provisions by at least a year.
The controversial bill has recently passed its third reading in Parliament, demonstrating the government and main opposition party's determination to develop medium-density housing.
“The inaugural year of medium-density housing” and how it came about
The arrival of Auckland's inaugural medium-density year in 2021 resulted from several interacting market factors. One of the most obvious drivers was high house prices: REINZ figures for November showed Auckland's median property price reaching a record NZ$1,300,000, with annual growth of 26.2%.
Demand outstripping supply is the direct cause of high house prices. Kiwibank estimates New Zealand's housing shortage at around 67000 homes, while the latest Realestate.co.nz data shows listings close to historic lows. Although reduced net migration and rising building consent numbers offer hope of easing the shortage, pandemic-related material and labour shortages have substantially slowed new-home construction. Higher building costs provide another driver of rising house prices. The housing shortfall accumulated over many years will take time to fill.
Alongside continuing its pandemic economic stimulus policies, many linked to greater infrastructure and housing investment, the government introduced a rapid succession of measures in 2021. These included an immigration 'amnesty' adding 165,000 permanent residency places, tax deductions strongly favouring new builds, a shared-equity purchase scheme for first-home buyers, and the Housing Supply Bill discussed above. All made a substantial 'contribution' to this round of house price increases.
Against this backdrop of soaring prices, medium- and high-density housing demonstrated its price advantage and gradually gained market acceptance.
Beyond persistently high house prices, repeated tightening of lending policies by the Reserve Bank of New Zealand and commercial banks in 2021, aimed at cooling the housing market, also helped usher in the inaugural medium-density year. The investor loan-to-value ratio (LVR) returned to 40%, debt-to-income ratios (DTI) began to be applied, and the new Credit Contracts and Consumer Finance Act (CCCFA) took effect on 1 December. As bank lending became harder to obtain, cheaper homes were relatively easier for investors and first-home buyers to purchase, favouring competitively priced medium-density housing.
The strictest-ever rental rules also took effect, encouraging investors to buy new homes offering higher rental returns and fewer problems. For developers, medium-density housing has shorter development timeframes and requires less capital than apartment projects. Government support for medium- and high-density housing, including interest deductibility on new builds for 20 years and relaxed development approval processes, also helped bring about the inaugural medium-density year.
Challenges of the medium-density era
New eras often bring both opportunities and challenges. Achieving further development requires seizing opportunities and, more importantly, knowing how to meet the challenges.
In my view, the greatest challenges of the medium-density era will arise in construction.
New Zealand's traditional building system is divided into residential and commercial construction. The two are clearly separated, with entirely different codes and standards, and separate practitioners, qualifications and contract management arrangements. The residential system is based on the NZS 3604 building standard and residential construction contracts, including the LBP licensing system, which has been in place for only 14 years. In theory, medium-density housing falls outside the traditional residential construction system. While continually introducing new policies, the responsible government agencies have failed to responsibly regulate and guide the market, instead allowing it to develop its own conventions and practices. I raised this point when invited to an LBP Board meeting in Wellington in 2018, hoping to draw the responsible authorities' attention to it.
Today, however, the medium-density housing market remains relatively disordered. Key building-standard details, such as fire protection and internal and external wall systems, depend on material manufacturers. Contract terms depend on banks' and industry associations' requirements, resulting in widely varying payment arrangements and considerable unfair competition. Even the title system has gaps. To satisfy buyers' attachment to 'permanent ownership', most medium-density homes are marketed with fee simple titles. Unlike apartments with strata unit titles, they have no body corporate, leaving potentially endless problems for future maintenance.
The relatively disordered medium-density housing market presents enormous challenges for practitioners and companies. Self-discipline and professional improvement are the best responses in the current circumstances.
For contracts, the appropriate contract form should be chosen and additional clauses confidently included to avoid construction disputes while ensuring warranty protection after completion.
For codes and standards, practitioners need to move beyond the residential–commercial divide and quickly master requirements relevant to medium-density projects, including passive fire protection, greater use of structural steel or reinforced concrete, and more complex external wall waterproofing junctions.
For development management, whether undertaking greenfield land development or subdivision in established areas, the medium-density era presents entirely new challenges in development, project and financial management, and marketing. Companies that seize the opportunity to improve development management quickly will rise rapidly; others will be eliminated by the market.
In design, most medium-density projects are currently designed by LBP-licensed designers whose training and experience are based on NZS 3604. Designers need to recognise the differences between medium-density and standalone-home design, focus on details specific to medium density, and insist on suitable, durable materials to remain successful amid these challenges.
What the medium-density era means for the Chinese property and construction industry
The arrival of the medium-density era will profoundly affect integration and development across the entire industry chain. Every stage, from development management and capital structuring to design, building code and standard development, construction contract and project management, practitioner training and material supply services, will inject substantial momentum into property and construction.
Medium-density housing is a relatively new market, and the Chinese property and construction industry is also an emerging driving force in Auckland. Chinese industry practitioners and companies have recognised the enormous opportunities of the medium-density era and moved quickly to secure an early advantage. Next, the New Zealand Chinese Building Industry Association (NZCBIA) needs to engage with technical matters at every stage and help develop the rules for each, while strengthening its own professionalism and professional ethics, helping the Chinese property and construction industry lead Auckland's medium-density era.