A surge in new building consents is piling extra pressure on New Zealand’s construction industry, which is already under considerable strain due to supply chain disruptions and severe labour shortages.

CoreLogic’s Cordell Construction Cost Index (CCCI) shows the country’s quarterly rate of growth hit a new record high in Q1, running at 2.4% for the first three months of 2022, surpassing the previous fastest rise of 2.2% recorded in Q2 last year. The latest annual increase of 7.3% is also a new record, eclipsing Q4 2017’s cyclical peak of 6.9%.

CoreLogic’s Chief Property Economist Kelvin Davidson says while NZ’s overall economic momentum has lost a bit of lustre in recent months, the construction industry remains strong on the back of dwelling consent numbers, which hit a record high of almost 49,800 in the 12 months to February. Estimates vary and carry uncertainty, but there’s a sense now that the industry itself might only have capacity for 30-35,000 dwellings in any given year – quite a bit lower than current consents, implying a spillover into future years too.

Although smaller dwellings such as townhouses and apartments account for 49% of the total figure and will require fewer materials than standalone houses, he says the sheer volume of new builds will mean there’s no respite for the stretched materials supply chain and an industry that’s facing labour shortages.

“Some key components are driving the increases in the prices of materials, including timber in general, structural products specifically, as well as metal prices,” he says.

“Variability in wholesale prices means suppliers are passing through increases to their customers more often and can’t retain existing price lists for too long. Wage costs are also rising in the house-building industry as firms work to full capacity.”

The record increase in construction costs follow the Reserve Bank’s decision last week to lift the official cash rate by 0.5%. The announcement is likely to add additional affordability challenges that are already at play across the established housing market.

Mr Davidson says the implications of higher mortgage rates and rising construction costs could potentially mean some home owners and buyers opt to forgo or delay new builds, renovations and alterations in the short term.

However, even if building consents tail off, it’s unlikely to translate into an easing of the CCCI with rises forecast to continue throughout 2022 with delays in construction completion times and material shortages to remain. Simply based on the pipeline of dwelling consents already approved, Mr Davidson says builders will be busy for some time to come yet.

“I wouldn’t rule out a period of double-digit cost inflation into next year too – especially if the Ukraine-Russia situation keeps the pressure on oil prices and global shipping even if/when omicron’s impact fades,” he says.

“One implication of the capacity pressures for house-building is the time between dwelling consent and completion could increase further. Meanwhile, product substitution could continue to become more common too – either costing more for the same quality, or downgrading on quality to keep the costs similar. Finally, reduced dwelling consents in future would tend to underpin the values of existing properties.”

CoreLogic researches, tracks and reports on materials and labour costs which flows through its Cordell construction solutions to help businesses make better decisions, estimate rebuild and insurance quotes easily and, ultimately, appropriate risk effectively.

The CCCI report measures the rate of change of construction costs within the residential market and covers freestanding and semi-detached single and two storey homes.

For more information or to read the report, visit www.corelogic.co.nz/reports/cordell-construction-cost-index.

ENDS

Source: CoreLogic