Cost pressures in busy construction industry start to ramp up

Friday, 19 February 2021

Construction at Kenepuru Landing, a new housing sub-division in Porirua. The cost of building is on the rise, as wage costs and material shortages start to bite.

An economist says it would not be a surprise if the cost of building a house picked up over the coming quarters as prices begin to rise.

CoreLogic's Kelvin Davidson said there was no shortage of work on, and with difficulties getting staff and some materials, consumers might soon see some pressures hit construction costs.

Stats NZ data out on Friday showed that for the December quarter, the construction industry was charging out 0.5 per cent more than it was in the previous quarter.

This included a 0.9 per cent increase in building prices and a 0.8 per cent rise in cost of construction services such as carpentry.

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The department's business price delivery manager Bryan Downes said it was not unexpected.

“We’ve recently seen average wages in the construction industry increase, increases in the number of people employed in the construction industry, as well as near-record levels of residential building consents.'’

Prices for building supplies have been a mixed bag, with wood down and concrete up.

Some of the price rises were potentially due to shipping congestion, the chief executive of PlaceMakers, Bruce McEwen, said.

“Many industries in New Zealand are experiencing supply chain and freight issues due to shortages and delays in shipping capacity, container availability and port space.

''High demand has also put pressure on numerous products lines, those that are imported as well as manufactured domestically.

''We are communicating with our customers, encouraging them to plan their product requirements ahead of time and we are working closely with suppliers to increase inventory levels or find appropriate product substitutes.”

More evidence came from CoreLogic's Cordell Housing Index Price, which found housing construction costs were up 0.4 per cent in the December quarter and 3 per cent over the year.

Construction costs seemed to slow down slightly towards the end of the year, and annual inflation was the lowest since the end of 2016, when it hit 2.6 per cent.

Davidson, CoreLogic’s senior property economist, said as the economy continued to recover, most sectors were expanding, apart from anything related to tourism.

“Unfortunately, it seems likely that this could mark the low-point for construction cost inflation in this mini-cycle, he said.

''Indeed, the industry remains very busy – new dwelling consents have risen back above 38,000 on an annual basis, which is the highest since the mid-1970s and reports of capacity constraints (especially to do with finding new staff) are becoming more common.''

There were also delays getting some materials through the ports, and work consented on alterations and additions was running at the highest level in 10 to 15 years, ''let alone any projects being done that don’t require consent''.

''That just reinforces how busy the industry is.''

With the Government expressing its intent to increase social housing and a lack of existing houses for sale, Davidson believed more people would want to build a new home.

One potential constraint was stringent attitudes from the banks towards mortgages for construction.

‘’However, there are few signs yet that this has become a problem, and with plenty of funding available to lenders, it seems fair to suggest that construction loan restrictions will emerge to any significant degree.’’

Price movements in building supplies has been relatively mixed in the last year.

Statistics New Zealand said annual increases in wood and timber were actually 5.5 per cent lower than 2019, and panels and plywood were 2.3 per cent lower.

Ready mix concrete was up 3.4 per cent, and so were the cost of some trade related services.

Prices rose for electrical installation (up 3.2 per cent), plumbing (3.7 per cent), and specialist services like roof framing, scaffolding and weatherproofing (2.5 per cent).