Construction costs hit new heights

Outcome will lead to building sector slowdown, says CoreLogic

Construction costs hit new heights

An anticipated fall in the number of new housing consents could soon ease the pressure on beleaguered New Zealand’s residential construction industry, a new report shows.

The building sector has been dealt a tough blow in 2022 with rapidly rising costs of materials and ongoing supply chain issues for more than 12 months. CoreLogic NZ’s Cordell Construction Cost Index (CCCI) for Q4 2022, which tracks the indexed growth of the country’s national residential building prices, recorded an increase of 1.7% in the final three months of 2022.

This is a significant deceleration from the record 3.4% increase in the three months to September. However, the annual CCCI growth figure, (which measures the cost to build a “standard” 200 sqm three-bedroom, two-bathroom single-storey brick and tile house) hit a new high of 10.4%, surpassing the previous record of 9.6% set in Q3 2022.

CoreLogic chief property economist Kelvin Davidson (pictured above) said a surge in new builds, materials supply issues and labour shortages, along with delays in completion, had all contributed to the unprecedented increase in the cost of residential construction throughout 2022.

“There had been suggestions demand would eventually ease, but evidence of a slowdown had only started to materialise in the final quarter of the year,” Davidson said.

“For most of 2022, new dwelling consents have remained high, with smaller dwellings – especially townhouses – becoming an even higher share of the total (nationally 56% in the year to October, and 77% in Auckland). But the very latest data is finally hinting at the long-awaited slowdown, with October’s dwelling consent figure itself down by 12% from the same month a year ago.”

Davidson said he warned even as new dwelling approvals slowed, the “huge” pipeline of consents that had already been granted would take time to be completed, which would provide builders and the industry with at least another six to 12 months of consistent work.

“Although the supply chain issues for building materials such as plasterboard have eased considerably, overall capacity pressures are still a concern,” he said.

“We can see the lingering strains clearly in the December quarter construction costs which were the lowest for the year, however the index is still running above the ‘normal’ increase of about 1% per quarter.”

Davidson said the latest CCCI results were also higher than the rise of 0.9% in Q4 2021, meaning the annual rate of cost inflation has accelerated to 10.4%, the first double-digit annual figure since the index was launched 10 years ago.

“Before easing over the rest of the year as the red-hot residential building sector finally starts to slow in a market where existing house values are dropping, it may well be difficult for builders to keep pushing up new-build prices to compensate for higher costs,” he said.

“If so, the net result of continued increases in construction costs, even if at a slower pace, would be further pressure on construction firms’ profit margins.”

Davidson said longer term, annual new dwelling consents are expected to ease from around 50,000 per year to the 30,000 to 35,000 range.

“This might sound like a significant slowdown, but remains higher than in previous years,” he said.

“This elevated level of construction is partly due to the need to replenish stock levels to meet New Zealand’s future population growth, but also reflects the myriad of demand incentives available for new builds, such as exemptions from the loan-to-value ratio rules and investors’ ability to claim mortgage interest deductibility.”

In October, Westpac NZ revealed building consents fell 1.6% in August 2022, and that monthly consent numbers had been consistently flat for a year. The number of dwelling consents fell slightly over the month to 4,164.

Westpac NZ senior economist Satish Ranchhod said looking into the details of August’s result, there was a continuing rotation away from standalone houses and towards medium-density developments such as apartments and townhouses.

“To date, that shift has been centred on Auckland where population pressures have been more pronounced and where planning restrictions have allowed for greater housing intensification,” Ranchhod said.  “We expect the shift towards medium-density developments will continue over time and that it will become increasingly widespread.”

Meantime, in December, a new housing partnership was announced delivering 19 new homes in Lower Hutt, in a deal between the Hutt City Council and whānau service organisations.

Mayor Campbell Barry said the tie-up acts on the council’s commitment to placing people and whānau at the centre of its own housing developments.

“Our city is facing significant challenges with homelessness and housing costs, and it’s projects like Takai Here Tāngata that will make a real difference for getting people and whānau out of housing stress and into permanent housing,” Barry said.