The great NZ townhouse squeeze

Someone paid $879,000 for a new Auckland townhouse a few years ago. Today it’s worth around $685,000 – $194,000 gone on a property type that was sold to investors as the future of New Zealand real estate.

The townhouse boom that reshaped suburban Auckland and Christchurch between 2020 and 2022 is now experiencing a hangover. Supply flooded in faster than demand could absorb it, migration slowed sharply, and investors who bought off the plans at peak prices are now holding assets worth considerably less than what they paid. Ouch!

How we got here
The Medium Density Residential Standards – passed with rare bipartisan support in 2021 – opened the door to three-storey, three-dwelling developments on almost any residential section in New Zealand’s five largest cities. The policy was well-intentioned: address chronic undersupply, improve affordability, and enable more compact cities. Developers responded, building thousands of new townhouses, particularly across south and west Auckland, and in Christchurch’s post-earthquake inner suburbs.

The tough thing, though, was that the timing was off. The construction pipeline was in full swing just as the conditions that made it viable collapsed. Net migration fell 92% below its 2023 peak, removing a major source of rental demand. Interest rates climbed sharply, rents softened, and because so many townhouses were built at the same time, in the same areas, buyers had options.

The net result saw Auckland experience 23 consecutive months of year-on-year inventory growth, reaching 30 weeks of stock by late 2025. Nationally, Cotality chief property economist Kelvin Davidson described 2025 as a “year of conflicting forces,” with the supply of townhouses specifically identified as a drag on Auckland prices.

The two-bedroom problem
Not all townhouses are in the same boat. Two-bedroom townhouses without car parks are bearing the worst of it, while three-bedroom townhouses with parking hold their ground considerably better.

Investors have taken to two-bedroom townhouses without car parks whereas owner-occupiers, who make up the broader buyer pool, typically want more bedrooms and at least one car park. When a property type can only be sold to one category of buyer, and that category is stretched, listings sit. Some Christchurch and Auckland agents reported two-bedroom townhouses languishing online for more than a year.

The land problem
The reason townhouses tend to underperform standalone homes over the long run comes down to land. In a typical townhouse, land might account for 25% of the property’s value; in a standalone house, that figure can be 60% or higher. Since it’s land that appreciates – not the building – townhouses carry a built-in growth disadvantage.

That disadvantage is magnified when supply is high. In markets like parts of Auckland and Christchurch, where townhouse supply surged, both townhouses and standalone homes sit 13-15% below peak, according to figures published by REINZ. Standalones, however, tend to recover more strongly when conditions improve, because land scarcity reasserts itself.

Investors who bought townhouses expecting the same capital growth trajectory as standalone homes were working from a flawed model. The yield may have looked attractive at purchase, but the capital gain did not play out.

Is there a floor?
Conditions are shifting, even if slowly. The construction pipeline is beginning to ease, with building consent volumes, while still elevated for multi-unit homes, down from their peaks as developer appetite cools. Over time, a slowing supply pipeline combined with improving demand should help stabilise values. But that process takes years, not months.

For investors holding well-located, well-specified townhouses – three bedrooms, car parking, quality build – the picture is more manageable. Demand from owner-occupiers remains, and better-quality stock in tighter locations tends to hold value. The stress is concentrated at the bottom end: small, poorly located, investor-spec stock where the only buyers were other investors.

What investors should know
If you own a townhouse and don’t need to sell, patience is your best asset. Forced selling is where the biggest losses occur. Most loss-making sales involve short hold periods; properties held for eight or more years overwhelmingly sell at a profit even through downturns.

If you’re considering buying, the townhouse market offers genuine opportunities but requires more due diligence than it did three years ago. Location within the city matters more than the type on its own. Look at what’s been consented nearby: if a site sits in an area with another 50 similar properties already on the market, the price ceiling is set by that supply, not by what the vendor paid.

And if you’re planning to sell, pricing realistically from day one is cheaper than sitting on the market for six months and eventually accepting less. Buyers in oversupplied markets have time on their side.

For advice on your property portfolio – whether you’re holding, selling, or looking to buy in the current market – call Goodwins on 0800 GOODWINS.