Private property issue #31 - are there too many townhouses?

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“Are there too many townhouses being built?” – investors always ask this question. Fair enough.

Heaps of townhouses are being built. And Townhouses are now 6x more popular than they were a decade ago. A massive shift.

But will all that building lead to an oversupply?

Let’s find out and start by asking … “what would an oversupply look like?”

If there was an oversupply, you’d expect to see:

• Townhouses take longer to sell than houses

• Townhouses fall in value more quickly

• Townhouses not going up in value as fast as other property types.

Let’s run the numbers to see whether this happens in practice.

For this, we’ll focus on Auckland and Christchurch since those are the areas investors ask about most often.

Test #1 - are townhouses taking longer to sell?

Theory: If there was an oversupply of townhouses, it would take longer to sell (compared to other property types). This is because supply would be outstripping demand.

Do we see that in the data?

No.

Since 1992, it’s taken roughly the same time to sell a townhouse as it’s taken to sell a house.

Today in Christchurch, it takes:

• 29 days to sell a townhouse (on average), and
• 31 days to sell a house.

Nothing about this graph screams oversupply to me. There were differences in the past. Those differences have now disappeared.

Test #2 – are townhouses falling in value?

Theory: If there was an oversupply, townhouse prices should fall more quickly compared to other types of properties. This would happen as buyers negotiate better prices.

Do we see that in the data?

No.

New Zealand property prices peaked in November 2021.

Since the peak, In Auckland:

• The average house price is down 16%.
• The average townhouse price is down 10%.

That’s according to REINZ’s median sales price data. (While not the best quality data, it’s still the best available now.)

In Christchurch, it’s a similar story:

• the average house price is down 10%,
• the average townhouse price is down 3.5%

Not seeing strong evidence that new stock is creating an oversupply.

Test #3 – are townhouse property values rising slower than other property types?

Historically, houses have risen about 0.1 - 0.6% faster than townhouses, which is marginal.

And both have grown in value much faster than apartments.

But if this recent building boom is creating an oversupply, we need to ask, “has the gap widened?”

In Christchurch, the data still suggests there’s no significant difference.

In Auckland, there is a slight divergence.

Houses went up in price by 25% a year at their peak. For townhouses, it was 15%.

This is the only evidence we’ve looked at so far that would hint that the new supply makes a difference.

But this (on its own) isn’t enough to convince me there is an oversupply. Because:

• There are lots of other times where there has been a temporary difference between the two
• Median sale price data jumps around depending on what properties are sold each month. So you need to see slam-dunk trends to have confidence in them. This isn’t a slam-dunk

So, from these tests, there’s not enough to convince me there is a townhouse oversupply.

Why isn’t there an oversupply?

There was a lot of data-crunching that went into these questions. And there’s even more analysis that goes into the reasons why there’s not an oversupply.

Want the whole analysis? Check out our video on the YouTube channel, released yesterday morning.

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