Construction cost increases hit 7-year low as residential building sector continues to cool

Wednesday, 10 January 2024

Construction costs are rising at the slowest rate in seven years as the heat comes out of the residential sector. (File photo)

Construction costs are rising at the slowest rate in seven years as the residential building sector continues to cool, CoreLogic says.

The property data firm’s latest Cordell Construction Cost Index (CCCI) shows construction costs rose 0.8% in the fourth quarter of 2023.

Although slightly higher than the rate of growth in each of the previous three quarters (0.4%-0.6%), it remained below the long-term average of 1.1%.

This brought the annual change to 2.4%, well below the 10-year average of 4.5%, and the slowest annual increase since the third quarter of 2016 (2.2%).

The sale is another sign that the construction sector is slowing. (Video first published April 13, 2023)

The index measures residential building costs based on the cost of a “standard” three-bedroom, two-bathroom, brick-and-tile single-storey dwelling.

CoreLogic chief property economist Kelvin Davidsonsaid the heat had come out of New Zealand’s residential construction sector in the last quarter.

“The industry itself is simply facing less pressure on overall capacity, compared to its peak at the end of 2022, where over-stretched builders struggled to keep up with workloads for new houses and renovations,” he said.

Records showed material supply chains were easing further, with timber prices stabilising, and even some modest falls for metal products.

CoreLogic chief property economist Kelvin Davidson says pressure on the industry peaked in late 2022. (File photo)

“On the flip side, however, there have been some price rises on general hardware, mainly imported products. It’s also possible that H1 insulation standards are exerting some upwards pressure, but it’s not possible to disentangle that effect from all the other influences,” Davidson said.

Looking further into 2024, the pace of construction cost growth could remain subdued, he said.

“The surge in net migration may help to restrain the pace of construction sector wage growth, which could also cap overall cost growth, considering that salaries account for 40-50% of the total cost of a new-build, excluding land.

“It wouldn’t be a surprise to see the annual rate of change in the CCCI run at 3% to 4% throughout the year, with builders still reasonably busy but not facing the intensity of recent years.”

The decline in new dwelling consents suggested the softer phase of activity could be a pattern that remained for some time,” Davidson said.

“Although it's unlikely costs for households potentially looking to buy a new-build or commission their own project will get any cheaper, at least costs shouldn't be spiking higher either,” he said.

“Encouragingly, demand incentives such as lower deposit requirements under the LVRs for people to invest in new-build properties should give developers some degree of confidence to keep bringing forward new projects. In the long run, this new supply is what we need to keep housing affordability under some kind of control.”