‘It’s a grim outlook’ for residential construction

Friday, 9 February 2024

The value of residential building activity is forecast to fall to a low of $27.1 billion in 2026–27.

Tough times are ahead for the residential construction sector, with the value of building activity and consent numbers expected to decline significantly, according to a new report.

The latest National Construction Pipeline Report, from the Ministry of Business, Innovation and Employment (MBIE), was out on Thursday, and it forecast total building activity would return to pre-Covid levels over the next few years.

The post-Covid housing boom drove strong growth in home building, with activity increasing from $31.8 billion in 2019 to $33.8b in 2022, the report showed.

But it forecast the value of residential activity to fall to a low of $27.1b in 2026–27, and then rise to $28.4b in late 2028, a level still below 2019 levels.

Residential building is the biggest segment of total construction activity, and the reduced strength in home building would contribute to total activity falling to a low of $54.6b in 2027, but that was consistent with 2020 activity levels.

MBIE manager system strategy and performance Michael Warren said several indicators showed the unprecedented post-Covid demand for residential building was alleviating and significantly reducing the demand on the sector.

“Residential building activity is forecast to return to levels that align with the sector’s capacity to deliver buildings ready for occupation, settling the sector into a more sustainable level where supply and demand is much closer than it has been in recent years.

New home building consents have declined from the record highs of 2022.

Another of the report’s key findings was that the number of new home building consents were falling away from record highs, but returning to more sustainable levels.

In 2021 and 2022 there were 49,003 and 49,537 new home consents issued respectively, but Stats NZ data on Code Compliance Certificates suggested the number of completions, and so the capacity of the industry to deliver was well below that number, it said.

Consents were forecast to fall to a low of 29,990 in 2025, and then increase throughout the remainder of the forecast period to 35,400 in 2028.

But high interest rates, increased costs, tougher borrowing requirements, and lower house prices have impacted on the sector, and some other recent assessments of its outlook were harsher.

Recent indicators and sector feedback suggested the sector was heading for a “hard landing”, according to the Ministry of Housing and Urban Development (HUD) briefing paper for the new government.

It said construction activity could drop to around 20% below sector capacity at a national level, while consents could fall to around 32,000 in 2024, which was below the sector capacity of around 38,000 to 40,000 homes a year.

“Although house prices are now rising, presales for new projects remain low and development finance is difficult to attain. It is expected that consents and construction activity will continue to fall.”

Simplicity Living managing director Shane Brealey says the residential building sector could be in for a a “hard landing”.

Historically, the construction sector had been slow to recover from cyclical downturns, and that created ongoing impacts on housing supply, it said.

MBIE’s briefing said while it was difficult to predict future building activity, it closely mirrored the general economic climate.

Product shortages caused by disruptions to supply chains in 2022 had largely been resolved, and the big building product price increases of recent years now looked to be stabilising, it said.

“High interest rates and inflation have contributed to a recent reduction in new building work, but an expected return to 1 to 3% inflation by the end of 2024 and easing interest rates indicate that building activity will stabilise in the long-term.”

Simplicity Living managing director Shane Brealey said the outlook for the sector was “a bit grim”, and it would be a tough couple of years for many.

HUD’s figures showed the construction sector employed 308,900 people, which was 10.6% of the country’s workforce, in the year to June 2023, he said.

“About 150,000 of them are in residential, and with HUD suggesting construction activity could drop by 20%, that affects a lot of people, and they’ll probably either leave the sector or the country.”

The construction sector employed 308,900 people in the year to June 2023.

He would not be surprised if there was a “hard landing” as he did not see what would produce a lot of medium to high density developments, which were the biggest determinants of overall numbers, he said.

“That’s because the level of pre-sales required will not occur for some time while interest rates remain high.

“But even when interest rates drop, and sales start to pick up, it only starts to impact the industry about 18 months down the track.”

The time needed for the consent process, tendering, site-works, and so on meant there was a much longer time frame for the industry to recover, and for large scale projects to get off the ground, he said.

With 40 plus years in the industry under his belt, Brealey had been through four boom and bust cycles, and knew the industry would boom again, with more houses always needed.

But local government could help by streamlining consenting processes, while central government could enable overseas investors in the sector, and give GST relief in the build-to-rent sector, he said.

“Build-to-rent developments, which are constructed using different funding models, are poised to boom in the current environment as the number of homes diminish and immigration goes up.

“They could offer some respite to the industry, whereas public housing only amounted to about 5% of total new supply in recent years. It could increase to 8% of a much reduced total number, but Kāinga Ora builds will not save the sector.”