Are Too Many Townhouses Being Built?
Ed McKnight dives into the stats around townhouse supply and separates fact from fiction.
9 July 2023
If you’re living in one of New Zealand’s main cities, you will see many townhouses under construction.
Some property investors ask: “Are too many townhouses being built? … and is there an oversupply?”
Townhouses represent 40 per cent of new dwelling consents. That is up from only 6 per cent 10 years ago.
Over half the consented properties in our larger cities like Auckland, Hamilton, Lower Hutt and Christchurch are townhouses.
So is there an oversupply? Because townhouses tend to be built in the main cities we will focus our answer on the country’s two largest cities – Auckland and Christchurch.
Is there an oversupply?
It’s tough to model the demand for townhouses on their own. The number of people who choose to live in a townhouse depends on how expensive apartments and houses are.
Instead, we can ask: “What would an oversupply look like?” That way, we can test for the symptoms of oversupply.
If there were too many townhouses, we’d expect to see:
- townhouses taking longer to sell
- townhouses fall in value more quickly
- townhouses not going up in value as fast.
So, do we see any of that happening?
Test no. 1: Are townhouses taking longer to sell?
Theory: If there is an oversupply of townhouses, we expect to see them taking longer to sell.
If there’s a newly-created oversupply of townhouses you’d expect to see lots of sellers and not many buyers. Therefore the number of days to sell a townhouse should be increasing (especially relative to houses).
Do we see that? No.
Before 2002, there were times when townhouses took longer to sell than houses in Christchurch. However, over the last 12 years they’ve been about the same.
In fact, today townhouses are selling more quickly. It takes 29 days to sell a townhouse and 31 days to sell a house.
Notably, the difference in the time to sell a house and a townhouse has remained consistent through the last decade.
If there was an oversupply, you’d expect these numbers to diverge.
The trend is similar in Auckland. Since 2001, the days taken to sell a townhouse have been very similar to the time to sell a house.
Test no. 2: Are townhouses falling in value more quickly?
Theory: If too many townhouses exist, prices should fall more quickly than houses since buyers can better negotiate.
New Zealand’s property prices peaked in November 2021.
If there was a newly-created oversupply of townhouses, it would be reasonable to assume that townhouses would fall in value much faster than standalone houses.
Do we see that? Not really.
Since the peak in Auckland, the average house price is down 16 per cent, and the average townhouse price is down 10 per cent (according to median sales price data).
In Christchurch, it’s a similar story: the average house price is down 10 per cent, and the average townhouse price is down 3.5 per cent.
So, we don’t see strong evidence that townhouse prices are falling away at a much faster rate.
Test no. 3: Are townhouse property values rising slower?
Theory: If there is a newly-created oversupply, we’d expect townhouse prices to increase more slowly than houses.
Historically, houses have grown in value about 0.1-0.6 per cent faster than townhouses per year.
When testing for an oversupply, the question is: “Has that gap grown wider in recent years as townhouse building ramped up?”
In Christchurch there has been no significant difference in price growth between houses and townhouses for the last decade.
In Auckland, there was a slight divergence over the last two years.
At their peak, houses grew in value by 25 per cent a year, whereas townhouses grew 15 per cent. Today, they are back moving in lockstep.
This one-year period is the only evidence that all this extra supply is making any difference.
And it’s worth pointing out that the data used to crunch this (while the best I have access to) has its flaws because it only tracks the average of the houses sold in that particular month.
So, if a whole heap of cheaper townhouses happened to be sold in that year, the data would be biased down.
Why isn’t there an oversupply?
So, from three tests there isn’t enough data to convince me there is an oversupply of townhouses. Why are some commentators jumping up and down saying there is one?
There are three main factors:
- Affordability. Auckland townhouses are 20 per cent cheaper than houses. As house prices escalate, people will buy what they can afford. For some, this will be a townhouse rather than a house
- Smaller households. Kiwis are having fewer kids and are getting married later. So, the average number of people who live in a house is decreasing. That means each household doesn’t need as much space or as many bedrooms, so we can live in smaller homes.
- Townhouses being built are already sold. Most banks won’t lend a developer money unless they’ve pre-sold 80-100 per cent of them. If you see new townhouses going up, there’s a good chance they won’t flood the market. They’ve already been sold.
Just because you see a lot of townhouses being built … that doesn’t mean there is an oversupply. That’s because the data suggests this supply is being met by demand.
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