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07 May 2024

New Zealand’s House Construction Costs Start to Normalise

Kiwi builders and homebuyers are seeing a significant weaning in the growth rate of construction costs.    

According to the latest data from CoreLogic's Cordell Construction Cost Index (CCCI), building cost inflation has slowed to its lowest level in eight years, recording a modest 0.5% increase in Q1 2024. It is less than half the long-term quarterly average of 1.1%, indicating a shift towards stabilisation after a period of high market volatility. 

The annual change in construction cost inflation is at 2.5%, well down the peak of 10.4 that was recorded in Q4 2022.

More certainty ahead for builders

CoreLogic Chief Property Economist Kelvin Davidson welcomed the news, saying that the lowering cost growth enabled builders and homeowners to build and renovate more confidently. Construction costs increased significantly during 2022 due to lingering COVID-19 supply chain issues, mass migration, and a boom in construction activity. 

“Supply chains have normalised and house-building activity has pulled back, easing the pressure on capacity and therefore cost growth,” he said. 

“Most costs have stayed relatively stable since the end of 2023, and the CCCI has recorded no significant movement across any particular product or labour rates, which can account for up to half the cost of a new build, excluding land…. (Additionally) that big issue that we had around Covid with plaster board and these sorts of things has eased right back." 

Mr Davidson highlighted that the decreasing growth rates were a good reprieve from market pressures, which previously resulted in construction costs being 25% higher than pre-COVID levels. 

“The industry is facing less pressure on workloads, and the decline in new dwelling consents suggests this softer phase of construction activity may remain in place for a reasonable period,” he said. 

“Flatter costs mean builders can price jobs more accurately, and consumers can be more confident that their final price won’t have spiralled by the time a job has been completed.” 

“While construction costs or the price of new builds won’t get any cheaper, the expected annual growth rate of 3 to 4% over 2024 means the cost to build won’t be spiking higher either.”

A look ahead for the industry

With many builders typically operating on a tight margin and a fixed-priced contract, the industry uncertainty has resulted in a declining pipeline of work. 

"We do know that workloads are slowing, and also anecdotally, we're just starting to see those concerning reports about a few more builders going into liquidation," Davidson said. 

"The near-term indicators are that that will continue. 

"We just have to hope that at a time when population growth is very strong off the back of net migration, that building consents find a floor soon and that the construction industry can start growing again soon." 

Davison claims that while the government plans to reform the building cost and consent system, it may take another two years for consumers and builders to see its effects. For reference, the cost of building work consented per square metre in 2022 was $2591 for a standalone house. In Australia, this figure is only $1743. 

Building and Construction Minister Chris Penk said that Kiwis were paying too much for building materials, and the new reform would increase competition while mitigating supply-chain disruptions. 

"It will really unlock that competition, and therefore the downward pressure on prices, whereas at the moment, the feeling is very much that with relatively few products available in the same space in New Zealand, there's a monopolistic effect," Penk said. 

In 2022, builders faced a significant Gib shortage, which Penk claims can be avoided by opening the market to more overseas materials. 

"It is future-proofing in that regard. But it's also every day ensuring the costs are as low as possible, because in a functioning market you have as many different would-be providers. And so the consumer can make the choice, between them and their builder," Penk said. 

Penk states that these regulations would take a few months to be drawn.

Key takeaway

Builders have long been battling rising construction costs, and this promising market direction is certainly noteworthy when planning for the year ahead. The lowering of building inflation could cascade to more opportunities and projects in the future. As such, companies looking to capture the market should consider securing their projects to minimise any risk. 

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.

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