Image source: Jocelyn Kinghorn
New Zealand’s construction industry continues to experience slow but steady growth, even as rising costs and economic headwinds dampen optimism for the sector’s immediate future. CoreLogic’s Cordell Construction Cost Index (CCCI) recently reported a modest 1.1% increase in construction costs for the September 2024 quarter, reversing a slight dip in the second quarter and marking the first time quarterly growth has exceeded 1% since late 2022.
However, this quarterly rise is tempered by a broader slowdown in construction activity. Annual growth sits at just 1.3%, significantly below the long-term average of 4.3%. This slow pace reflects a broader downturn that has gripped the construction industry for nearly two years, with declining dwelling consents, high levels of existing housing stock, and shifting tax policies reducing the incentive to invest in new builds.
Economic and Regulatory Pressures Hit the Sector
One of the most pressing issues facing the sector is the shortage of work, with a recent survey conducted by Civil Contractors New Zealand and Teletrac Navman indicating that 64% of businesses are struggling to find projects, a sharp increase from 29% in 2023. This lack of available projects has significantly affected industry confidence, with only 37% of businesses expecting revenue growth in 2024, compared to 47% last year.
Alan Pollard, CEO of Civil Contractors New Zealand, emphasised the gravity of the situation: “If we conducted the survey again today, the response would be even more dire. Right now, I am fielding daily emails from our members, who are deeply concerned that their businesses may not survive.”
He continued, “I can’t stress enough the importance of a well-defined, committed, and funded pipeline of work. The government needs to act quickly to restore business confidence. Promises alone won’t get things built.”
Adding to the strain are regulatory challenges, with 57% of businesses citing issues with government procurement guidelines and consent processes, up from 36% in 2023. Rising compliance costs and frequent project overruns have also contributed to a pessimistic outlook. CoreLogic’s data shows that actual construction workloads have dropped by 15% since their peak, and annual dwelling consents have fallen by 34% from their 2022 high.
Rising Costs Amid Softening Demand
The rise in construction costs continues to put further pressure on businesses. The increase in materials such as kitchen joinery and window hardware, coupled with ongoing labour shortages, has contributed to the rising costs. However, some materials like PVC piping have seen price drops. With over 26,000 properties currently listed for sale—up from 23,000 last year and double the 13,000 on the market in 2021—high levels of existing stock further weaken demand for new builds.
Kelvin Davidson, CoreLogic’s chief property economist, pointed to tax changes, including the shortening of the Brightline Test and the reinstatement of mortgage interest deductibility, as factors that have further dampened demand for new properties. “With such an elevated stock of existing listings, there’s less incentive for buyers to consider new-build properties,” Davidson said.
Future Outlook Dictates Cautious Optimism
While the short-term outlook remains subdued, experts see potential for a turnaround in 2025. The Reserve Bank’s introduction of debt-to-income ratio restrictions, which exempt new builds, may stimulate demand in the coming months. Falling interest rates and a more stable labour market are also expected to help.
Davidson remains cautiously optimistic: “Developers may feel more confident to increase supply if these changes, combined with falling mortgage rates, create a relative shift in demand towards new builds over the next 12 to 18 months.”
However, confidence in the industry’s ability to overcome its current challenges is waning. The 2024 Construction Industry Survey found that only 57% of businesses believe they can weather these difficulties, down from 62% in 2023. Confidence in the future pipeline of work is also low, with just 21% of businesses expressing optimism for future projects, down from 28% last year.