Rapidly rising construction costs add more fuel to the inflation fire

Friday, 13 August 2021

The cost of building a new home has become an even more finely balanced exercise.

Construction costs have risen at their fastest pace since at least 2012, further stoking the likelihood of an interest rate rise next week.

According to CoreLogic’s Cordell Housing Index Price (CHIP), residential construction costs surged 2.2 per cent in the June quarter, the largest since the index began.

That's pushed the annual growth rate of building costs to 4.5 per cent, up from 3.3 per cent in March.

Kelvin Davidson, CoreLogic NZ’s chief property economist, said the economy continued to grow with most sectors expanding to the point where inflation was now a key concern.

An iwi-owned building company is offering a $20,000 cash bonus to tradies willing to down tools overseas and be part of New Zealand’s building boom.

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It was likely to be “just another piece of ammunition” for the Reserve Bank, which was largely expected to raise interest rates next week as it tried to get ahead of general price rises.

Getting building materials into the country has become much more expensive, with some shipping lines dropping New Zealand off their routes.

Davidson said the construction sector had been running at full capacity for some months.

Reports of labour shortages and stress on supply chains had been coming in, “and these are now starting to flow through more clearly to the prices that builders are having to charge their clients'.

“While some suppliers had previously absorbed cost increases or substituted materials where possible, we are now seeing the costs passed on to the consumer.”

Furthermore, there was unlikely to be much let-up for some time. The number of new dwelling consents remained “very high,” driven by smaller dwellings such as townhouses.

Work on consented alterations and additions was also running at the highest levels in over a decade, “let alone any projects being done that don’t require consent”.

CoreLogic is anticipated that its CHIP index for the next quarter will show more price pressures and ultimately could slow the present boom in house building, Davidson said.

“It’s difficult to put precise figures on how fast prices might rise, but what is clear is that anybody wanting to build a new house will be facing higher costs in future – which in turn would eventually start to crimp demand and therefore remove some of these pressures.”

Julien Leys, chief executive of the New Zealand Building Industry Federation, said that post-pandemic business model reviews by global shipping and building supply companies meant that New Zealand was no longer included on their supply routes, with supplies getting only as far as Australia.

That put additional costs on building supply companies here. Leys said he had spoken to one New Zealand company spending as much as $65,000 a week on shipping costs.

He estimated some commercial building projects were being delayed for up to eight months.

CoreLogic is also advising homeowners to ensure their home insurance cover is keeping pace with rising replacement costs.

Insurers provided rebuild calculators to allow consumers to track how construction cost changes would impact on their homes if it needed to be rebuilt.

“In our experience, increasing sums insured by even a few hundred thousand can cost a lot less than you might think,” said CoreLogic's head of product Tom Coad.