Home building cost growth slows, but prices still high

"There's still a lot of pain happening," one expert says

Home building cost growth slows, but prices still high

According to CoreLogic’s latest Cordell Construction Cost Index, the price to build a standard single-story, three-bedroom, two-bathroom house rose by only 0.6% in the December quarter – a rate that is half that of the previous quarter.

Annually, the rate has dramatically slowed to 1.1%, a sharp decline from the 10.4% increase in 2022.

“The slowdown in the construction sector generally leads to less price increase, which is what we’re seeing now,” Nick Goodall (pictured above left), CoreLogic’s head of research, said in an RNZ report.

Factors influencing building cost changes

The easing of COVID-related supply chain pressures and a reduction in labour costs have contributed to the slower price increases.

“People are pricing more competitively for jobs due to fewer available jobs,” Goodall said.

Although some costs such as carpet, wall insulation, and plasterboard have risen by 3 to 4%, prices for external timber products and kitchen joinery have fallen by 5 and 3%, respectively.

Challenges and opportunities in construction

Despite lower interest rates potentially aiding recovery, Goodall suggested that restoring confidence in the sector will take time.

Many remain hesitant about committing to new builds due to economic uncertainties and the struggles within the construction industry.

However, Goodall noted, “There are incentives encouraging particularly investors towards new builds, like more favorable debt-to-income ratios and lower deposit requirements,” RNZ reported.

Industry perspectives on pricing and demand

Sam Stubbs, founder of Simplicity KiwiSaver and Simplicity Living, expressed surprise that costs were rising at all given the weak demand.

“If we had a proper, efficient industry, prices would be coming down to stimulate demand. But that’s not happening,” Stubbs told RNZ.

He also noted the difficulty of making building projects financially viable, especially for those dependent on presales or bank funding.

Looking ahead: Potential for building cost reductions

Brad Olsen (pictured above right), CEO of Infometrics, anticipates some pressures could re-emerge on construction costs as interest rates drop and activity potentially increases.

However, Olsen also sees a “downside risk” due to the significant level of discounting and reluctance among material firms to push through price increases.

“There's still a lot of pain happening,” Olsen told RNZ, indicating that while the sector might be nearing a turning point, substantial challenges remain.

Overall, while the rise in building costs is slowing, the construction sector faces ongoing hurdles due to high prices, hesitant investment, and economic uncertainties. Industry leaders suggest that significant changes are needed to stimulate demand and make building more accessible and affordable.

Read the RNZ report.

Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.