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Slow Growth Forecasted for New Zealand's Construction Market Due to Rising Costs of Labour, Materials, and Energy
The latest reports by ResearchAndMarkets.com have forecasted a slow growth for New Zealand's construction sector.
This forecast comes as a result of rising material, energy, and labour costs that have impacted the industry. Additionally, the continued tightening of monetary policy by the Reserve Bank of New Zealand (RBNZ) will continue to impede the industry's growth.
The report expects New Zealand's construction industry to grow by 3.6% in real terms in 2023 before recording an annual growth of 2.6% from 2024 to 2027. This growth is mainly supported by the government's investment in transport, energy, and housing construction projects.
Government projects to fuel growth
According to the ResearchAndMarkets.com reports, the initial contribution to the forecasted growth is the rebuilding of infrastructure that was damaged by Cyclone Gabrielle in early 2023. The government's 2021-24 c to develop land transport services across the country will also bring a much-needed boost, with an estimated investment of $34.6 for the project.
Additionally, housing developments and regional infrastructure projects will also contribute to the growth of the construction sector. In October 2022, the government announced a $192 million investment for the project. $61.5 million will be allocated towards the Lower Hutt's RiverLink and Valley Floor intensification project.
This investment is part of the government's goal to build 11,500 homes over the next 10-15 years, including affordable and public housing under its "Public Housing Plan."
Construction industry subdued due to labour
Although the demand for construction is relatively stable, labour shortage continues to have a significant effect on construction companies. A survey of larger construction business owners shows that 80% of respondents claimed labour as the biggest challenge. Other concerns raised were the uncertainty of work in the future, erosion of profit margins, and project delays due to material costs.
Kelvin Davidson, CoreLogic's Chief Property Economist, said that the construction market had entered a "more subdued phase" compared to COVID-affected periods - although construction businesses need to be wary of rising labour costs.
"New dwelling consents are slowing, but remain elevated with more than 40,000 on a 12-month rolling basis. This is keeping builders relatively busy working through a pipeline of previously approved dwellings, as well as a continued stream of work on alterations and additions."
"Although building capacity pressures have eased, half of project costs stem from labour, and continued growth in wages is keeping some pressure on overall construction costs."
The tight labour market will continue to be a challenge for construction businesses, as New Zealand continues to record high labour force participation and low unemployment and underemployment rates. However, the jobless rate hit a two-year high in June 2023, somewhat easing wage pressures and the labour market.
Increased overseas migration could further mitigate the labour shortage, but this remains unclear and could also present a double-edged challenge by decreasing housing supply and affordability rates.
According to BDO New Zealand's construction sector leader Nick Innes-Jones, the risks surrounding the construction sector needed to be shared rather than construction companies taking it all head-on.
"This is a significant issue for construction businesses, who are carrying all the risk of inflation on their shoulders …. More productive conversations around contracts are needed across the industry, as well as a wider appreciation of risk."
"The whole industry, including clients, must work together to ensure risk is distributed fairly and according to who is best placed to manage it."
Key Takeaway
With rising labour and material costs, insurance companies must take the necessary steps to mitigate risks associated with project delays. This is especially true for smaller builders, where productivity and resource management are crucial to their projects.
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.