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New Zealand’s Construction Cost Records First Drop in 12 Years
After a period of normalisation of housing construction costs, the construction industry has recorded its first drop in the price of building a new home in over 12 years.
According to the latest data from the Cordell Construction Cost Index (CCCGI), the cost of building a standard single-storey, three-bedroom, two-bathroom, standalone dwelling has decreased for the first time since 2012. It recorded a 1.1% drop in Q2 2024 after a modest increase of 0.5% in Q1.
This is significant news for aspiring Kiwi homeowners and builders, who have been battling home and material shortages, as well as supply chain disruptions, for the past few years. The decline in building costs was also concurrent with a record-low annual industry growth rate, which slowed from 2.3% in Q1 2024 to just 0.6% in Q2.
According to CoreLogic’s Chief Property Economist Kelvin Davidson, the drop was attributed to the completion of building consents and the easing of supply chain disruptions caused by COVID-19.
“The downturn in workloads in the construction sector has eased the pressure on capacity and that’s flowed through to reduced building costs,” Davidson said.
“Coupled with a slowdown in the growth of average hourly wage rates, the flattening of building materials costs has also caused a reversal in trends from the rapid growth in construction costs in the past few years.”
The impacts of the pandemic have seen the cost of building a home increase by 41% since 2019, making new homes even more unaffordable for Kiwis. However, the CCCI report states that the price of important materials has fallen, including structural steel, tapware, electrical light fixtures, and kitchen joinery.
“Construction costs spiked during 2022 due to lingering COVID-affected supply chain issues, as well as a boom in construction activity as dwelling consents peaked around that same period,” Davidson said.
“Those factors have all now been resolved with material supply back to normal, dwelling consents falling and the pipeline of jobs coming to completion. This has alleviated significant pressure on the industry, freeing up capacity and reducing costs.”
According to Davidson, the drop in costs wasn’t surprising, given that the industry has shown soft operating conditions. Additionally, the recent changes to the Brightline Test and interest-deductibility rules have reduced the attractiveness of new builds to investors.
Davidson also claims that more established properties have become available in the market, which reduces demand for new builds. The stabilisation of the construction sector is welcomed news for homebuyers looking for more home options and selections.
“Elevated stock levels among existing property listings means fewer households are going down the new-build path. It’s also possible the higher cost of a new build compared to an established property could also be a deterrent, especially when general household finances are tight,” he said.
Subdued construction market forecasted
Davidson suggested the next quarters could see subdued new-build activities and softer new dwelling consents. This could further result in declining overall construction costs for builders and homeowners.
Recent loan changes by the RBNZ have encouraged the building and buying of new residential homes. On July 1, 2024, the revised Debt-to-Income (DTI) settings exempted construction loans from banking restrictions, with the goal of encouraging new home builds. This, coupled with existing loan-to-value exemptions, is set to ease construction costs.
According to Davison, while these exemptions are intended to increase residential construction and soften the housing crisis, it’s unlikely to cause any drastic increases in construction activity.
“The exemptions and lower construction costs are good news for those considering new building projects or buying from developers,” he said.
“However, with dwelling consents down nearly 30%, the downturn could impact future housing supply. That said, the risks of widespread housing shortages re-emerging seem relatively low for now, especially since the Government is pushing so hard at present to increase housing supply.
“The hope is that more stable economic conditions and lower interest rates in 2025 will help revive house building activity.”
Key takeaway
Builders and homeowners can look forward to low material costs and improved project margins. Now more than ever, it’s essential that these builders start their projects on the right foot by taking active steps to minimise any project risks. Working with an experienced insurance provider can alleviate risk and give them peace of mind.
Bonded NZ helps builders and contractors find the best insurance, warranties, and surety bonds that keep their best interests in mind. Whether it's a big or small project, our cost-effective options help them secure their projects at every angle.
For more information about our services, contact our team today.