Rising costs accompany a pickup in dwelling consents and building activity
New Zealand residential construction costs rose 1.1% in the June quarter, according to the latest Cordell Construction Cost Index, pushing the annual rate of growth to 3.5%, the fastest pace in almost three years.
While quarterly growth remains close to its long-term average, the annual figure has now accelerated for three consecutive quarters, signalling an end to the unusually subdued cost environment of recent years.
Cotality NZ chief property economist Kelvin Davidson (pictured) said the shift reflects a construction sector coming back to life after a prolonged downturn, with dwelling consents climbing from below 34,000 last year to more than 39,000.
"Construction costs aren't surging again, but conditions are becoming less favourable for builders and households, who may have been hoping build costs would soften further," Davidson said.
Global pressures add to rising costs
Alongside the domestic pickup, oil price increases tied to the Middle East conflict have pushed up transport costs, while suppliers have flagged price rises across structural steel, plumbing components, insulation, and aluminium roofing accessories.
Davidson noted builders have limited room to pass these costs on, given existing house prices remain flat or only modestly higher.
"Builders are still operating in a competitive market...so there's limited ability to pass higher costs directly on to customers," he said, adding that many firms are instead absorbing the pressure through tighter margins.
Feasibility improving despite cost pressures
Davidson said improving economic conditions should still support a gradual building recovery through the second half of the year, provided mortgage rates stay lower and inflation continues to ease.
"If inflation can moderate a bit and interest rates remain supportive, more households will have the confidence to commit to building," he said.
Davidson added that current cost growth, while accelerating, remains far more modest than the sharp increases seen in 2021 and 2022, reflecting healthier activity levels rather than pandemic-era supply shocks.
That confidence may be reinforced by existing lending settings: LVR and DTI rules both carry exemptions for new-build finance, giving advisers a further lever to help clients weigh up build feasibility even as costs rise.
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