Home building costs up 4.9% annually, but stabilising

Friday, 1 December 2023

On average, home building costs in the main centres rose by 4.9% over the year to November.

Residential building cost increases are slowing, but the change comes at a bumpy time for the industry as consents for new homes continue to decline.

New figures from Quotable Value’s Costbuilder database showed there was a 4.9% increase in the average cost of building a standard three-bedroom home in the main centres over the year to November.

But the annual increase was less than half of the 11.3% rate at the same time last year.

It was also a significant drop from a 14.7% increase at the end of November 2021, and the 20.9% annual increase recorded in June last year.

Since the database’s last update in June there had been an overall increase of 0.9%, while elemental rates were up by 0.4% on average.

CostBuilder spokesperson Martin Bisset said construction costs had all-but stabilised throughout the second half of this year, due to a “somewhat” improved economic outlook internationally.

There had also been an easing in the global supply chain issues that emerged during the pandemic, he said.

Local and international uncertainty make it difficult to predict how costs will evolve, CostBuilder’s Martin Bisset says.

“Fuel costs have largely stabilised for the time being, inflation is in slow decline, and interest rates are expected to be at or near their peak now.

“These factors and others closer to home, including increased migration helping to fill labour shortages, are currently keeping rising costs in check.”

Costbuilder, which monitored the costs of over 8000 building components including labour rates, was updated twice a year, and the latest figures showed decreases in some elemental prices.

The biggest price change was for reinforcing steel, which fell by 16.9% due to a more favourable exchange rate, but the cost of the frame and substructure went down 4% and 2.9% respectively due to the reduction in steel rates.

In contrast, infrastructure was up 7% due to increases in plant hire fees and drainage rates, while demolition costs rose 5.1% due to average increases for plant hire and tip fees. Drainage and roofing were up 5% and 2.8% respectively.

But there was a great deal of uncertainty locally and internationally, and it was difficult to predict how construction costs would evolve into next year and beyond, he said.

“Economic conditions remain highly volatile, and there's still a question of whether or not interest rates will ease at all next year, and by how much will depend on inflation being contained.

Westpac senior economist Satish Ranchhod is forecasting a downturn in the construction sector over the year ahead.

“As we rely on importing a lot of building materials in this country, a lot also depends on the buying power of the New Zealand dollar.”

While building costs were stabilising, the number of new home consents continued to decline, according to Stats NZ.

On an annual basis, 39,900 consents were issued nationwide over the year to October, a drop of 21% from the same time last year, Stats NZ’s latest figures showed.

That was down on the record high of 51,015 new homes consented nationwide in the year to May 2022.

Stats NZ construction and property statistics manager Michael Heslop said the number of new homes consented in the year ended October was now at a similar level to early 2021.

“Fewer new homes were consented in each month of 2023 so far, compared with the same month of both 2022 and 2021.”

There were 3060 new homes consented in October, but once seasonally adjusted that was an 8.7% increase on September. It followed a seasonally adjusted fall of 4.6% in September.

Westpac senior economist Satish Ranchhod said the 8.7% increase in October was a surprise on the upside, but the result should be taken with a large grain of salt.

The underlying trend in consents remained soft, and Westpac continued to forecast a downturn in the construction sector over the year ahead, he said.

“Those we’ve spoken to in the industry have highlighted a sharp drop in forward orders.

“With large increases in interest rates and build costs, as well as lower home prices, prospective buyers have been nervous about making purchases and developers have been reluctant to bring new projects to market.”

Conditions in the housing sector were in for a shake up over the coming year, he said.

“We’re now seeing the rate of construction cost increases slowing, although we haven’t seen any material drop in build costs.

“At the same time, population growth is surging, and we expect house price growth will take a step higher over 2024 supported by changes in government policy.”

Over time, those factors would help to support building activity, but tight financial conditions still signalled some tough times ahead for the sector, he said.