Are there too many townhouses being built in New Zealand?

If you’re living in one of New Zealand’s main cities you’ll see a whole bunch of developers building townhouses.

And if you’re an investor interested in New Builds, you may feel like all the New Builds are townhouses.

So, it’s normal that some property investors ask: “Are there too many townhouses being built? … Is there going to be an oversupply?”

This matters. Investors don’t want to be stuck with a property that doesn’t go up in value because there are too many of them.

They also don’t want a property that has a poor rental return because they can’t find a tenant. 

So, in this article, you’ll learn how many townhouses are being built (and where). You’ll also learn whether there are too many and if an oversupply is coming investors’ way.

And if you have a question, write your questions or thoughts in the comments section below.

What Is A Townhouse?

A townhouse is a property that fits the area of a standalone house, on a smaller section. So, same amount of people on a smaller plot of land.

Typically, townhouses are 2 to 3 storeys. They’ll often have a private patio garden, and come with a car park or a garage.

You’ll usually find townhouses in a row of properties attached by at least one wall (if you’re on the end), or they may have another unit connected on either side.

This is what you commonly see in central areas. This includes most developments from Wolfbrook, Williams Corporation and similar developers.

How Many Townhouses Are Being Built?

Townhouses are making up more of today’s market. A whopping 42 out of every 100 property consents are townhouses. (Stats NZ, Year ended May 2023).

That’s a massive change. Just 10 years ago only 7 properties in every 100 consented were townhouses.

In our larger cities townhouses make up over half newly-consented properties.

That’s the case for Auckland, Hamilton, Lower Hutt and Christchurch. That’s where the fear of an oversupply comes from.

But, this doesn’t mean townhouses are popular everywhere.

Over the last 12 months there were no townhouse consents in the Clutha District, and only 3 in Kaikoura.

Generally, townhouses are only built in the main cities.

That's why we'll focus on answering: is there an oversupply of townhouses in Auckland and Christchurch?

It’s very difficult to accurately model the demand for townhouses alone.

That’s because the demand for townhouses is fluid. It depends on what’s going on for apartments and standalone houses too.

So, it’s much easier to ask: “What would an oversupply look like?”

This way we can run a few tests to see if we have oversupply symptoms.

For instance, if there was an oversupply, we would see:

• Townhouses taking longer to sell
• Townhouses falling in value more quickly
• Townhouses not going up in value as quickly as other property types.

So, do we see any of that happening?

Test #1 – Are Townhouses Taking Longer To Sell?

Theory: If there was an oversupply of townhouses, we would expect there to be a lag in the time it took to sell them.

This is because if there’s too many townhouses there would be lots of sellers and few buyers.

So do we see that? Short answer, “No”.Let’s look at Auckland.

There have been times where townhouses took longer to sell, but over the last 19 years they’ve been roughly the same.

In fact, there is no statistically significant difference between the two.

There are, of course, differences. Sometimes it takes longer to sell a house; sometimes it takes longer to sell a townhouse. But, overall there’s no major difference.

That’s not screaming oversupply to me.

Test #2 – Are Townhouses Falling In Value More Quickly Than Houses?

Theory: If there is an oversupply, the price of townhouses should fall faster. 

New Zealand’s property prices peaked in November 2021. 

If there was an oversupply of townhouses, then they should fall in value faster than houses. 

Do we see that? No, not really.

Since the peak in Auckland, the average house price is down 21% and the average townhouse price is down 14%. That’s according to median sales price data.

In Christchurch it’s a similar story: the average house price is down 10%, the average townhouse price is down 7%.

Of course there are months where townhouses have fallen in value more quickly; and there are months where houses have fallen faster.

But, there’s no evidence that the price of townhouses is falling way faster compared to houses.

Test #3 – Are Townhouse Property Values Rising Slower Than Other Property Types?

Theory: If there is an oversupply, townhouse prices should go up more slowly than houses.

Historically, houses have risen slightly faster than townhouses, but the difference is marginal.

In Christchurch the difference is less than 0.1%.

This is small, and bear in mind that both have risen in value much faster than apartments.So, has the gap widened? Are we seeing a large change? Because that’s what we’d expect to see if there was an oversupply.

In Christchurch, the data still suggests it’s so close to not warrant any major difference.

Now, this data isn’t the best. It’s median sales data, but it’s all I had access to. This data only tracks the average of the houses actually 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.

Why Isn’t There An Oversupply?

From the three tests we can see there isn’t enough data to convince me there is an oversupply of townhouses.

But, why not? If there are 6x more townhouses being built than 10 years ago … why isn’t there an oversupply?

The answer is, people are changing how they live and the housing they need. Primarily, this is driven by 3 factors:

Factor #1 Affordability

Townhouses are more affordable than houses.

Auckland townhouses have historically been 20% cheaper than a standalone house. That’s the average for the past 30 years.

More recently they’re even more affordable, especially as developers are building smaller properties.

The average sale price of a townhouse today is about 30% cheaper than a house in Auckland.

That's why some Kiwis think: “I can’t afford a house, so I'll buy a townhouse and move into a house later.”

So people change their behaviour. That’s why many investors and first home buyers are considering townhouses.

Factor #2 Smaller Households

New Zealanders are settling down later in life. We’re also having fewer children.

The average births per woman in New Zealand is 1.61 (let’s say 2 babies), according to Stats NZ data (2021). That compares to 3.98 babies per woman in 1961.

So, if we are having smaller families, then Kiwis don’t have as many large family-sized homes. We can do with fewer bedrooms on the whole.

On top of this, New Zealanders are getting married later. Back in the 70s the average age for a man getting married was 23.6. Today it’s 32.4 … almost 9 years older.

Because of this we are settling down later in life, and don’t need to provide for a family early on.

That changes the types of houses Kiwis need. Single-person households and childless couples don’t need as much space. A townhouse will do.

Factor #3 Developers Have Already Sold the Townhouses They’re Building

There’s a good chance all those townhouses you can see developers building are already sold.

Banks usually won’t give developers money unless they’ve sold 75-100% of the properties already.

This means these properties aren’t all going to hit the market at the same time looking for buyers. On the whole, the developer has already sold them.

Townhouses – Who Are They The Right Fit For?

As we’ve stated, affordability is a big drawcard. So, an affordable 2-bed townhouse would be a good fit for emerging investors (and first home buyers).

Instead of buying one expensive property, some investors could buy multiple affordable townhouses.

This could also allow you to invest in several cities. You might buy one 2-bedroom townhouse in Christchurch and another in Auckland. That means you can add diversification to your portfolio.

These townhouses also tend to work better in main cities with decent populations.

Tenants are used to living in higher-density properties, so there is demand for these types of developments.

Townhouses – Who Are They The Wrong Fit For?

A townhouse is likely not to be the right fit if you are investing outside one of the main centres.

If you are dead set on investing in Kaitaia, Te Anau or Kaikoura, a townhouse may not be the right fit at all.

It’s not as common for people to live in townhouses in these rural areas, so these sorts of properties are better suited for those investing in the main centres.

Renovations-focussed BRRRR investors should also stay away from New Build townhouses. Since they are brand new, you don’t have the ability to renovate them to increase their value.

Should I Buy A Townhouse?

There will be some people who will say: “There’s still an oversupply coming. I’ve seen a whole bunch of townhouses being built down the street.”

Just because there are lots of townhouses doesn’t mean there is an oversupply.

That’s because there is also a lot of demand meeting that supply.

All things considered, a townhouse can be a good investment for some people, but it is important to note that not every townhouse is automatically a good investment.

It comes down to the numbers and being able to sort the good investments from the bad.

That’s why, here at Opes, we work with 97 property developers from around NZ. We scour the country looking for the right properties for Kiwi investors. 

Once we find them, we run the numbers to offer good investment properties to our investors.