Construction activity across New Zealand remains very high and that’s putting pressure on labour capacity in the industry, as well as materials costs. Indeed, costs have increased by around 1% or more for all but one of the last thirteen quarter, with construction cost inflation up 0.9% in December 2019 quarter.  

This left the annual rate of cost inflation at 3.9%, a slight drop on the prior quarter (4.3%), and down from the recent peak growth rate of 6.9% at the end of 2017. The annual rate of cost inflation now sits just below the five year average rate of 4.1%.

However, compared to cost/price inflation across the economy as a whole, the construction sector is under more pressure. Indeed, consumer price inflation for the fourth quarter was 1.9% annually, so construction costs are still rising at more than twice the rate of general inflation.

That’s not surprising, when you consider how busy the industry is to keep pace with the demand for new-build housing. In the year to November 2019, there were over 37,000 consents for new dwelling units across New Zealand, the highest level since the first half of the 1970s. And it’s not just new housing either – consents for alterations & additions are also at historical highs.

Non-residential construction activity is pretty strong too. In the year to September 2019, the value of new work in this sector was $6.6bn, up by over $1bn (or 18%) from the previous year. Shops, restaurants & bars, storage buildings, and hotels, motels, boarding houses & prisons were key contributors to the latest increase in activity.

One early indicator of how construction activity may move in the near term is ready-mixed concrete production, and there has been a general plateauing of production over the last year. Production in the year to September 2019 was 4.16m cubic metres – only 0.5% higher than in the prior year (4.13m cubic metres). So perhaps we are seeing the construction industry getting closer to capacity.

Overall, the construction industry remains very busy and that is maintaining upwards pressure on costs. It’s hard to see this pressure being alleviated to any significant degree in the near term.