u/richieFromConductor

I wanted to get a rough idea of what property costs might look like over the next 10 years

We’ve got a $210 billion national infrastructure gap already, and the gap’s going to get bigger with growth and climate change adaptation needs.

According to Te Waihanga (The Infrastructure Commission), it’s going to take over $1 trillion over the next 30 years to fix, and that requires a near-doubling of the rate of planned investment.

But these number are just too big to wrap your head around. So for a moment let’s assume that the last 5 years of price increases tells us something about what’s to come in the next 10 years. Then:

Going off the past 5 years, a $900k Auckland townhouse would pay $4k more per year in property costs in 10 years’ time in today’s dollars (a 63% increase)

I’ll focus on ‘annual household infrastructure cost’ (AHIC) defined as Council rates, property insurance and water charges.

Let’s focus on a $900k Auckland townhouse. Assuming the townhouse isn’t at high flood or landslide susceptibility risk as otherwise all bets are off anyway.

Rough estimates of current 2026 baseline AHIC:
- Rates: $3k
- Insurance: $2.5k
- Water: $1k
- Total: $6.5k.

Using the last 5 years of actual increases for Council and Watercare, and the Reserve Bank’s estimate of property insurance increases over the last 9 years, we get nominal annual cost inflation rates of 6.12% (Council rates), 7.52% (Water), and 7.89% (Property insurance).

Adjusted down for a standard 2% inflation, here is where we land in today’s dollars: By 2036, that $6.5k bill would climb to $10.6k - a 63% increase.

The even scarier part: The costs are probably going to rise more than that

The Infrastructure Commission’s $1 trillion figure excludes:
- The impact of all severe weather events (which are expected to increase in frequency and severity with climate change)
- All investment to cope with climate change’s impacts (aka climate adaptation) other than sea level rise. That goes for severe events but also general weather variability which gets spicier. Inland flooding and city stormwater upgrades are additional to the $1 trillion. You only have to look at the Council’s flood map to see how big of an issue that is.

This is only intended to be very high level order of magnitude stuff. Disclaimers include:

- I’ve used the last 5 years of data because it represents our current, modern baseline. Yes, this period includes the post-COVID inflation hangover and the immediate insurance repricing after the 2023 floods. That could be seen as a ‘worst-case’ extrapolation. However, given that Te Waihanga says we’re facing a structural $1 trillion deficit and climate events are increasing in frequency and severity, the last 5 years are arguably much closer to our new reality than the quieter decade that preceded them.

- The $1 trillion covers all infrastructure, including roads and hospitals. The property-related cost is only a part of it, but the point about doubling the investment is assumed to apply to property

- The insurance increase is over the last 9 years but it’ll do. And if you take out the highest risk houses the average insurance price increase drops, so that will overstate the increase.

- There might also be productivity and real wage growth that partly offsets, but the distributional impact of that will be unequal.

Can households even bear this cost? And should they?

Some policy questions to me:

- Wealth vs income. Rates scale with CV, but you can’t pay the rates bill with bricks. Watercress charges are flat-user pays. If you’re cash-poor, like retirees or first-home buyers who maximised their borrowing, and/or are less privileged, these cost increases are going to really, really hurt.

Should central government, which collects progressive income tax, step in to balance the scales or do we just accept that people will be forced out of their homes? And where are they going to go anyway if all the houses are too expensive to live in? Mechanisms like rates postponement might help you keep living in the house, but the current owners are still suffering the same wealth shock because it reduces the property value

- Intergenerational fairness. The past hasn’t paid their share (hence the existing gap), and the future generations will benefit from what gets built next.

To what extent should the current generation of home owners and renters foot the bill?

- Debt ceilings. Councils and Watercare have hard limits in their borrowing capacity for various reasons.

If they can’t borrow to spread the cost over time, then the current financing and funding models are going to need to change, but how?

- Risk allocation and the insurability cliff. Whatever Councils and utility companies should spend but don’t isn’t just a magic cost saving: it just gets shifted from a public debt to a private contingent liability borne by households. Result: Specific households get nailed, and more of the country’s property becomes uninsurable.

You can argue to what extent it’s efficient or appropriate for households to bear at least some of the risk - if you now build in a risky area should everyone bail you out? What if you’ve already been there 20 years and had no idea about any of this? Is that fair? Beyond social justice questions, even if you want to look at it from an economics perspective, I’d guess that in many cases there’s a higher total cost by pushing it onto households arbitrarily and catastrophically rather than just fixing the drains (not to trivialise fixing the drains, they are v expensive)

- Liveability tradeoffs. If we tried to fix all the drains and build all the sea walls etc and fully close the gap, what money is left over for making the place great to live?

Takeaways

I don’t have any answers for those that are already struggling and will struggle more. But at least to avoid it getting harder if you can:

- Thoroughly check the natural hazard maps, especially before you buy a new place but also for renting. The Councils have done an impressive job all over the country in making this data easily accessible. That goes for flood maps, landslide susceptibility maps (Akl), and liquefaction (Chch). They aren’t perfect, and remember they change as the underlying data and assumptions get updated. What’s not in the blue now may be in the blue in the future.

And make sure you’re interpreting them carefully: the Auckland Council’s flood map currently marks overland flow paths with a solid thinnish blue line which gives no indication of the area that will be covered. They explicitly say in the notes that “In reality, water will cover a wider area than the lines show.” Plus being close to or far away from a flood area in meters doesn’t tell you much as if the house is up a bank it may well be ok, and conversely if it’s all flat then even places that look farther from the blue area may get swallowed up with a model update. I’ve seen it happen. If you’re concerned, consider getting a specialist report to be on the safe side

- Budget carefully if you’re buying a house or thinking of upsizing, and run your own conservative affordability calculations. The amount a bank will lend you is often not a prudent indicator of what you can truly afford.

- If you’re currently in an area that’s at natural hazard risk, I’d at least think twice before building an extension.

- Sadly the situation is often even harder in the regions because you’ve got big fixed infrastructure costs being spread over less households that live more spread out. Council rates in the regions can be significantly higher in dollar terms, and far higher as a % of house value.

RBNZ holds OCR at 2.25% but hikes are expected.

"Annual headline inflation is expected to increase to a peak of 4.3 percent by the September 2026 quarter and to return to the target mid-point in mid-2027. While shorter-term inflation expectations have increased, medium- to longer-term expectations remain close to 2 percent."

In the last OCR announcement back in March, the RBNZ said that if fuel price increases bleed into wider inflation, that would require “decisive and timely increases in the OCR”. So I think we’re seeing them stick to that tune without pulling the trigger just yet.

What’s interesting now is that we get a forecast of future rates - see chart above. As you can see, the forecast lines have a habit of looking like a glide path, with actual rate changes being more rapid. That's not a criticism of the RBNZ, it's just what usually happens when you try to build a forecast. But it could well mean that rates rise faster and harder than this makes it look like they will.

What can we make of this? Interested in your thoughts, but mine are:

• The longer-term rates are well up from the 4.99% we saw a while back. 5 years (at 80% LVR) is now 5.69% (BNZ), 5.75% (ASB), 5.79% (ANZ, Westpac) up to 5.89% (Kiwibank). Betting on the next 3-5 years is absurdly hard, so I think you’re having to pay quite a bit in ‘insurance premiums’ on those longer-term rates. Said another way, the retail banks may well have over-corrected to protect their margins (and same with the swap market).
• Locking in long might still be right for you if you want maximum certainty though - lots of people out there doing it tough and when jobs start looking uncertain, certainty on outgoings can be a good thing.
• If you’re thinking of refinancing and want to lock in long, then the bank you go with is going to make a big difference to the outcome. BNZ vs Kiwibank, a 0.2% rate difference is going to cost you over $3k on a $600k mortgage over the 3 year lock in. That’s roughly the same as the cashback after you factor in legal fees
• The risk-free return on paying down your mortgage is rising (compared with investing in other things). Remember that paying down your (owner-occupied) mortgage saves you cash rather than generates you income - which means it’s not a taxable gain. So an interest rate of 5.5% assuming you’re on a 30% tax rate is more like a 7.9% pre-tax return. That’s pretty strong - and whatever you’re investing in better be doing well on a risk-adjusted basis to beat that.

General comment not financial advice