Construction costs soar

CoreLogic’s Cordell Construction Cost Index (CCCI) shows the first quarter of this year also hit a new record high of 2.4%, surpassing the previous fastest rise of 2.2% recorded in the second quarter last year.

CoreLogic’s Chief Property Economist Kelvin Davidson says while New Zealand’s overall economic momentum has lost a bit of lustre in recent months, the construction industry remains strong on the back of dwelling consent numbers, which hit a record high of almost 49,800 in the 12 months to February.

“Estimates vary and carry uncertainty, but there’s a sense now that the industry itself might only have capacity for 30-35,000 dwellings in any given year – quite a bit lower than current consents, implying a spill over into future years,” he says.

Although smaller dwellings such as townhouses and apartments account for 49% of the total figure and will require fewer materials than standalone houses, Davidson says the sheer volume of new builds will mean there’s no respite for the stretched materials supply chain and an industry that’s facing labour shortages.

“Some key components are driving the increases in the prices of materials, including timber in general, structural products specifically, as well as metal prices,” he says.

“Variability in wholesale prices means suppliers are passing through increases to their customers more often and can’t retain existing price lists for too long. Wage costs are also rising in the house-building industry as firms work to full capacity.”

Davidson says the implications of higher mortgage rates and rising construction costs could potentially mean some home owners and buyers opt to forgo or delay new builds, renovations and alterations in the short term.

However, even if building consents tail off, it’s unlikely to translate into an easing of the Construction Index with rises forecast to continue throughout this year with delays in construction completion times and material shortages to remain. Simply based on the pipeline of dwelling consents already approved, Davidson says builders will be busy for some time to come yet.

“I wouldn’t rule out a period of double-digit cost inflation into next year too – especially if the Ukraine-Russia situation keeps the pressure on oil prices and global shipping even if/when omicron’s impact fades,” he says.

“One implication of the capacity pressures for house-building is the time between dwelling consent and completion could increase further. Meanwhile, product substitution could continue to become more common too – either costing more for the same quality, or downgrading on quality to keep the costs similar. Finally, reduced dwelling consents in future would tend to underpin the values of existing properties.”