The latest CoreLogic NZ residential construction costs report (CHIP March quarter), which is out today, shows that housing construction costs rose 1.0% over the March quarter; the 11th quarter of the past 13 where construction costs have risen across New Zealand.

In the lead-up to the coronavirus-driven lockdown, the construction sector across New Zealand had been very busy, placing pressure on labour capacity as well as materials costs. Indeed, the Cordell Housing Price Index (CHIP) showed construction costs rising by 1% from the December 2019 to March 2020 quarter – the 11th quarter of the past 13 where costs had risen by at least 1%.

This left the annual rate of cost inflation at 3.6%, a slowdown from the previous quarter (3.9%) and also comfortably below the most recent cyclical peak (6.9%) in Q4 2017. However, at 3.6%, construction inflation is still running well ahead of general price pressures across the economy as a whole (2.5% in the year to the March quarter).

Given the high levels of activity (pre-lockdown) in the construction sector and the labour/materials pressures mentioned above, it’s not surprising that cost inflation is still elevated. Indeed, in the year to February, new dwelling consents reached 37,882, the highest figure since September 1974 (37,919). For context, at the trough in July 2011, there had only been 13,236 new dwellings consented over the prior 12 months. It’s not just new housing that has been booming either – consents for alterations & additions were also at historical highs prior to lockdown.

Non-residential construction activity has been pretty strong too. In the year to December 2019, the value of new work in this sector was $7.1bn, 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.

From here on, the construction sector is clearly going to face a slowdown, as will many (or all) other parts of the economy. Finance will be difficult to obtain and some projects have already been put on hold due to the coronavirus-related uncertainty. In turn, a decline in activity will ease the pressures on capacity and labour, eventually flowing through to reduced cost pressures.

Please download the report for full analysis.