Building activity will not crash

By Andrea Milner

A forecasting report by BIS Shrapnel on residential and non-residential building activity for the next four years predicts the North Island’s total building activity will decline 4% this year and the South Island’s will drop by 2%.

This will be the second year of decline, bringing the total downturn to 10% following a record level of building authorisations in 2004-2005. The record followed four years of continuous growth where activity rose by 50% from the 2000-2001 period.

Director of building services at BIS Shrapnel Robert Mellor says building activity has fallen due to a large drop in net overseas migration over the past thee years, interest rates rising 2.25 percentage points since early 2004, and weakening activity in commercial and industrial building.

The report projects modest economic growth in New Zealand over the next two years due to sluggish private consumption expenditure and business investment, and weakening non-residential building expenditure.

Only modest growth is forecast for residential building through to 2011, however Mellor says the residential market is not oversupplied, and that in fact Auckland has a deficiency of residential stock.

Activity has been sustained by an underlying demand for new dwellings of around 27,600 per annum over the five years to 2005-2006.

The number of new dwellings is warranted by the growth in population and its structure; the influence of economic factors on household formation, (in times of high rents and house prices, less young people will leave their parents’ houses for example); demand for second houses and vacant stock; and demolition.

The number of new dwellings authorised in 2005-2006 was 25,400, which was down 19% on the record peak in 2003-2004. The report forecasts a modest recovery of 2% to 25,800 this year – part of a two-year plateau in the property cycle, with more recovery anticipated in 2008-2009.

“We’re in the flat stage of a cycle; a period of stability for building and construction authorisation,” says Mellor. “Demand and supply are in balance.”

Median house prices for Auckland, Wellington and Christchurch will also remain flat, turnover will decline and people will take a holding position during the plateau, he says. The caution is due to rising fixed interest rates.

Mellor says presently there is not much scope for the Reserve Bank to ease monetary policy, commenting that it has been applied as a much more blunt and severe instrument than in Australia, resulting in New Zealand’s less stable economy.

He predicts the cash rate could drop three-quarters of a per cent by March 2008, but the high percentage of people on fixed rates will keep the composite mortgage rate around 8% through to 2009 before easing back to 7.75% in 2010.

The value of housing alterations and additions will see gradual growth through to 2009-2010, the report says.

Following growth totalling 48% since 2000, non-residential building authorisations declined by 1% in 2005-2006 and are predicted to fall 10% this year, and slip a further 6% next year before rebounding 10% in 2008-2009 due to stadium building in anticipation of the Rugby World Cup.