There exists a Chinese curse – “May you live in interesting times”
Well it’s certainly ‘interesting’ times for people in Christchurch and it has been ‘interesting’ for some time. I’m sure most people in Christchurch would rather live in times of much leass upheaval.
So the government has given some certainty to people who have a house in the Red zone of Christchurch. And these people will apparently have an offer within 8 weeks. Now what is going to happen then? Where are these 5100 households going to spend their money? What will this mean for real estate markets in and around Christchurch and indeed, the whole country?
The options for these people must be a) Buy a section (in a seizmic safe area) of Christchurch and build a new house or b) Buy elsewhere – and this could either be an existing home or necessitate the construction of a new house.
Now this is an interesting article from The Press this morning. In it, the local real estate guy says there might be
“2600 vacant sections across Canterbury – and only 760 were available for immediate sale.”
But the mayor, Bob Parker says there are around 10,000 sections available now and another 5 or 6 thousand will be available shortly.
So this is a huge disparity. And you know who I believe? The real estate guy. Because he’s talking about what is actually there right now. Bob Parker will have no idea how difficult, expensive and time consuming it is to bring a section to the market these days. And the reason is that councils are very reluctant for this to happen. And when it does, they have their hand out for large upfront payments. So it’s ironic that the mayor, who leads the organisation which has been stalling the release of new sections since the first quake (and actually long before that) would be so naiive. It’s his organisation that is the problem and he doesn’t even see this.
You know what the one saving grace in this situation may be? CERA. The government has created a new agency to oversee the redevelopment of Christchurch. Why did they do this? Because the council would be totally inept at doing it that’s why. So CERA is basically there to get things done – without having to wait for council consent to do so. Which is very lucky for them, oh how many private individuals and companies would love to be able to circumvent the council in the development process!
Over at the NBR, I saw this article. Subscription required sorry (by the way, it’s well worth the $89 for 6 months of online reading I reckon). It highlights how the government is having to fast track subdivisions by applying pressure etc. But the really interesting bit about this article was the comments from people saying things like “It should only cost $30k to develop a section and so developers should be able to sell them for $50k and make a profit” which is just so unbelievably naiive. You might have been able to do this in the 1960s!! But it’s a lot more costly and protracted process these days.
This was my reply:
You have no idea how much it costs to develop a section.The council costs alone are usually at least $30k per lot.
Reserve contributions, development contributions and other financial contributions demanded by councils and other utility providers are huge these days.
Add in to that the cost of engineering reports (who is going to sign off on these in Christchurch now?), the physical works etc. and you’re quickly up to $100,000 per lot. Now I admit, these are Auckland figures but they won’t be too different in Christchurch. Maybe $75k?
And that is with a zero dollar land value, and zero dollar profit. So those who think cheap sections can be created quickly and easily are dreaming. The CCC are still opposing subdivisions in the environment court!
Add into those costs things like holding costs, interest costs and the situation looks even harder.
So what does all of this mean? Well I think it’s going to be very hard for people to rebuild in Christchurch – or in fact anywhere in the country. Why? Because of the cost and the lack of labour, that’s why.
I would say you might be able to pick up a section for say $180k, and then if you can find a builder, you could build a house for how much? Maybe another $250k? So already you’re up to $430,000 and many people won’t be getting that much money from their payout. Now I guess they might be able to bridge the gap with a bigger mortgage. And the banks are certainly coming to the party on that score with their offers of cheap loans. See here and here.
But what about materials and labour? Both of these things are not cheap right now. I recently undertook a development project and couldn’t believe the cost of materials. Bulk things like timber, concrete, steel etc. are all dear. It’s all going to China (and even to Aussie where they are doing a lot of rebuilding after their floods). And the smaller specialist items like bolts, hinges, door handles are dear also. And so is everything else like paint, windows, insulation etc.
Builders are probably rubbing their hands together with glee! They will do very nicely out of all this. But there is a shortage of them and so the punters are going to have to pay dearly for their services.
And compounding this are the recent changes to the building code. So this means that any new houses built will have to be built to much higher standards than the old houses these people are walking away from. And this all just adds to time and cost…
So what does all of that mean? Well I think we’re going to see a lot of people with money in the bank – after their payouts, who can’t afford to rebuild. And so they are going to be looking to buy existing houses in other parts of the country. And I think this is going to lead to quite a substantial surge house (and apartment) prices – over the whole country.
So I feel sorry for these people, they are going to be in for a shock I reckon. But as an investor, who recently built 3 apartments and endured the nightmare that that entails, I say bring on the price rises!