Pull back in construction sector long time coming

Economist Tony Alexander has been warning about a widespread weeding out of businesses in the residential building sector since early-2021 but says he did not expect that it would take until now for the pullback in activity to really get underway.

“Just as prices reached strained levels so too has the level of construction and the number of consents being issued for new dwellings.” Those consent numbers are only now falling off – but largely for houses and not yet for townhouses.

The latest RBNZ report on the economy shows construction activity was incredibly strong in the third quarter, up 5.1%. And there's more in the pipeline - for a while at least. Investment in the construction space accelerated further in Q3, with residential building up 2.7% and non-residential up 4.7%.

However, Kiwibank says the report is old and construction will be one of the major swings south next year.

Alexander believes change will come during the summer. “There is a lot of weakness to come in the townhouse building sector and summer is going to bring many examples of building companies going under and projects being left half-completed with people losing their money.

“Like excessively high inflation, and a boom/bust cycle in house prices, this is another way in which the Reserve Bank has worsened stability in our economy. It seems to have become a net negative for the country.”

He says it seems reasonable to expect the following next year:

  • falling consumer spending for the first half of the year and retail business failures;
  • house prices edging lower until the middle of the year;
  • fixed mortgage rates for periods beyond one year falling before the middle of the year;
  • house construction embarking on a two- to three-year period of decline;
  • falling numbers of properties listed for sale;
  • firm net migration inflows:
  • a probable change in government late in the year:
  • the Kiwi dollar either rising or falling against the currency of your choice – or the other way around.

He says mortgage borrowers would be best to fix at one or two year rates.

“Three years feels too long given the likely easing in monetary policy over 2024 and 2025.

“The environment is going to be one of high instability and borrowers need to be careful not to get overly fixated on what the general themes are from one week to the other,” Alexander says.

“It is best just to remember that monetary policies here and offshore are guaranteed to get inflation down eventually but if borrowers are heavily exposed to short-term rates as we head into the peaks you run the risk of panicking and locking in for a long- term fixed rate at the worst time in the cycle for doing so.”

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