Residential building cost increases slowing as consents drop

Monday, 9 January 2023

Building cost increases are beginning to slow, like driven by a drop-off in new consents, CoreLogic head of research Nick Goodall says.

A drop-off in new consents could help ease pressure on the building sector, and may already be showing in a slowdown of build-cost increases, CoreLogic says.

The property data firm’s Cordell Construction Cost Index showed the cost of building continued to go up during the final quarter of 2022, but the pace of the increase had dropped significantly.

The index focused on cost increases in residential construction.

In the last three months of last year costs increased 1.7% compared to the record 3.4% increase in the three months to September.

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The long term average puts cost increases at about 1% per quarter.

Despite the slowing of cost increases, the index showed the cost to build a standard 200m² three-bedroom, two-bathroom single-storey brick and tile house hit a new high of 10.4%, surpassing the previous record of 9.6% set in the third quarter.

The rate of residential construction has been running hot.

CoreLogic chief property economist Kelvin Davidson said there had been a lot of talk about a slowdown in the sector, and the latest data suggested it was finally hitting.

“October’s dwelling consent figure itself is down by 12% from the same month a year ago,” Davidson said.

Annual inflation for construction costs was expected to hold at about 10% for the first three months of this year, before easing over the rest of the year as the red-hot residential building sector finally started to slow, he said.

He warned that even as new dwelling approvals slowed, the huge pipeline of consents that had already been granted would take time to be completed, providing builders and the industry with at least another six to 12 months of consistent work.

Despite this, builders may find their profit margins squeezed.

“In a market where existing house values are dropping, it may well be difficult for builders to keep pushing up new-build prices to compensate for higher costs,” he said.

“If so, the net result of continued increases in construction costs, even if at a slower pace, would be further pressure on construction firms’ profit margins.”

Longer term annual new dwelling consents were expected to ease from around 50,000 per year to the 30,000 to 35,000 range, which sounded like a significant slowdown, but remained higher than in previous years, Davidson said.

A surge in new builds, materials supply issues labour shortages and completion delays had all contributed to the unprecedented increase to the cost of building, he said.

“Although the supply chain issues for building materials, such as plasterboard, have eased considerably, overall capacity pressures are still a concern.”

Townhouses remained the building of choice in the final quarter of 2022, making up 56% of builds nationally and 77% in Auckland.