News & Research

Annual construction cost growth hits a record high as industry slowdown looms

A nascent drop off in the number of new housing consents could soon help to ease the pressure on New Zealand’s residential construction sector, which has dealt with rapidly rising costs for more than 12 months.

CoreLogic NZ’s Cordell Construction Cost Index (CCCI), which tracks the indexed growth of the country’s national residential building prices, recorded an increase of 1.7% in the final quarter of 2022, 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 in Aotearoa, hit a new high of 10.4%, surpassing the previous record of 9.6% set in Q3.

CoreLogic Chief Property Economist Kelvin Davidson said a surge in new builds, materials supply issues, and labour shortages, alongside completion delays, had all contributed to the unprecedented increase to the cost of residential construction throughout 2022.

He said 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.

“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),” he said.

“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.”

Mr Davidson warned even as new dwelling approvals slowed, the ‘huge’ pipeline of consents that had already been granted would take time to be completed, providing 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 cost figures (1.7% rise), which were the lowest for the year, however the index is still running above the ‘normal’ increase of about 1% per quarter,” he said.

“The latest CCCI results are 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.

Annual inflation for construction costs is expected to hold at around 10% for the first quarter of 2023 Mr Davidson said, before easing over the rest of the year as the red-hot residential building sector finally starts to slow.

“However, 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. 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,” he said.

“Longer term, annual new dwelling consents are expected to ease from around 50,000 per year to the 30-35,000 range, which sounds like a significant slowdown, but remains higher than in previous years.

“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.”

CoreLogic researches, tracks and reports on materials and labour costs which flows through its Cordell construction solutions to help businesses make more informed 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 for a typical, ‘standard’ three-bedroom, two-bathroom brick and tile single storey dwelling.

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

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Meet Kelvin Davidson

Chief Economist

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Kelvin joined CoreLogic in March 2018 as Senior Research Analyst, before moving into his current role of Chief Economist. He brings with him a wealth of experience, having spent 15 years working largely in private sector economic consultancies in both New Zealand and the UK.

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