News & Research

Construction costs rising at the fastest annual pace in almost four years

CoreLogic's Cordell Construction Cost Index (CCCI) for Q4 2021 showed that despite an easing in the quarterly rate of growth, construction costs rose by 6.1% over the 2021 calendar year, the highest since Q1 2018 (6.2%) and not far short of the cyclical peak of 6.9% in Q4 2017.

Cordell data shows the cost to build a ‘standard' 200 sqm brick and tile house in Aotearoa rose 0.9% in the final three months of 2021.

CoreLogic's Chief Property Economist Kelvin Davidson says timber prices and record building consents are a couple of the key drivers.

"Despite reports of a slight softening in the rate of price growth for timber in the last quarter of 2021, our perception is that timber products for housebuilding are generally continuing to see significant price increases,” says Mr Davidson.

"New dwelling consents are also running at record highs. This, combined with consented alterations and additions projects, work that doesn't need consent plus the wildcard that is Omicron indicates that there is plenty more to come in terms of cost growth. It wouldn't surprise me if construction costs accelerate further in the next few quarters, possibly even hitting double digits.”

Rising construction costs come at a time when CoreLogic is reporting a 27.5% rise in housing values nationally over the 12 months to January. Higher construction costs are likely to add to affordability challenges already at play across the established housing market.

"What we have at the moment are headwinds and tailwinds colliding. On one side we have the loan to value ratio rules which favour lending for new-builds, plus the rejigged system around investors claiming mortgage interest as a deductible expense, both which should underpin construction demand and activity to some degree.

"But mortgage rates have risen sharply, meaning households will be less able to stretch their budgets than before. And of course the rapid construction cost growth itself may deter some households from going down the new-build or significant renovation path, which I expect will lead to an eventual slowdown in new work being consented later this year,” says Mr Davidson.

"Of course, builders themselves may not be too concerned about a possible reduction in consents, as the pipeline of work they already have booked stretches for many months yet,” he adds.

Simone Moors, CoreLogic NZ Country Manager, warns rising construction costs don't just impact home renovators, builders and businesses, but all home owners and property investors.

"In these times of rapidly rising home and construction costs, under insurance can quickly become a real threat to what is a most valuable asset. It's important that home owners keep track of their sum insured and annually check that it is sufficient should the worst occur by using their insurer's rebuild calculator or giving them a call,” said Ms Moors.

CoreLogic researches, tracks and reports on materials and labour costs which flows through its Cordell 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.

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READ THE CORDELL CONSTRUCTION COST INDEX

The CCCI report indicates the rate of change in prices within particular segments of the New Zealand construction industry; measured daily through the use of detailed cost surveys. Download the report.

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