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New Zealand’s Building Costs Rise by 2.4%: Records Smallest Increase Since 2016
Low home demands caused by high interest rates and economic uncertainties have slowed the pace of house-building costs in New Zealand.
Recent numbers by CoreLogic, a property information and analytics company, have reported a 2.4% annual increase in the nation’s construction costs – making it the smallest annual increase since the 12 months ending September 2016. Additionally, Q4 2023 recorded a 0.8% increase from the previous quarter.
Fuelled by weak economic outlook and consumer confidence
The slow growth of building costs results from a weaker economic growth outlook and the hike of interest rates by the Reserve Bank. After a series of increases in 2022 and early 2023, the official cash rate currently holds steady at 5.50% - but the Reserve Bank warns of further hikes if price pressures do not ease.
The economic uncertainty has led to a decline in house prices and lower customer confidence in 2023. Although customer confidence has increased somewhat at the end of 2023, their willingness to spend remains at low levels. Ultimately, it has slowed down the demand for home construction.
CoreLogic reports that the number of building consents issued in the year through October fell by 21% compared to the previous year. CoreLogic’s chief property economist, Kelvin Davidson, claims that the reduction in pressure on the building industry’s overall capacity has slowed down the cost increase.
“Records show material supply chains are easing further — with timber prices stabilising and even some modest falls for metal products,” Davidson said.
A far cry from Q4 2022
The cost slowdown is a significant shift from the end of 2022 when builders faced heavy workloads for home renovations and buildings.
2022 saw the construction cost index increase to a record 10.4%, a metric used in determining the cost of building a standard 200-square-meter brick and tile house, including materials, plant hire, labour, and subcontractors. This spike, propelled by border closures and limited foreign workers, had hiked the building costs significantly for builders and consumers.
Excluding land, salaries make up a significant portion of the costs of new builds, and many construction businesses were still dealing with high labour costs and worker shortages for the bulk of 2023. CoreLogic forecasts that the construction costs will remain relatively moderate in 2024. This is in part due to record levels of migration that alleviate wage pressure.
Davidson claims that builders will remain busy in 2024, but the intensity of the recent years will decrease. He forecasts that the annual rate change in the building cost may stay at around 3-4% throughout the year.
“Although it’s unlikely costs for households potentially looking to buy a new build or commission their own project will get any cheaper, at least costs shouldn’t be spiking higher, either,” he said.
Key Takeaway
Builders are expected to see an easing of building cost pressures, but the month-to-month index and external factors remain largely unpredictable. Builders should continue to mitigate risk and secure all assets and projects for the foreseeable future.
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