Auckland construction key to economic growth

Rising construction activity means that New Zealand’s GDP growth should be solid this year - despite the woes of the dairy industry, a new report from HSBC states.

HSBC chief economist Paul Bloxham said construction activity has been a key source of growth for the economy in recent years.

Not only was construction activity 45% higher in the first quarter of 2015 than it was in the first quarter of 2011, but it has contributed an average of 0.5bps to GDP growth every year since 2011.

In contrast, dairy exports contributed 0.3bps to GDP over the same period.

Canterbury’s post-earthquake rebuild has been the main driver of construction activity, but data shows that rebuild activity appears to have peaked.

However, HSBC believes that strong population growth and rapidly rising housing prices, should support a further upswing in Auckland housing construction.

Bloxham said that, while construction in Auckland has been lifting slowly, it still lags population growth and has not been reducing the estimated 20,000 dwelling shortfall.

“A significant lift in construction would help correct Auckland's supply-demand imbalance, reduce the risk of further housing price overvaluation and help to offset the eventual drag on growth from falling rebuild activity in Canterbury.”

The scale of home-building necessary to meet Auckland's needs over coming years is likely to be even larger than the residential rebuild in Canterbury, Bloxham continued.

“We expect this to be a key support for growth over the next couple of years.”

In their latest economic overview, Westpac economists argue that the economic tide has turned for New Zealand.

One of the few economic bright spots they see is Auckland’s pressing need for new housing and infrastructure to accommodate the city’s rapidly growing population.

Westpac chief economist Dominick Stephens said they do expect some moderation in population growth over the coming year, but it is unlikely to turn decisively until Australia becomes a more compelling alternative destination.

He said the issue was how quickly Auckland construction could and would ramp up to meet demand.

“Issuance of residential building consents has doubled in recent years, but given the recent downturn in confidence it would be optimistic to expect a sudden further leg higher,” Stephens said.

“However, with development rules slowly being relaxed and interest rates falling, we do expect building activity in the region to continue rising over time.”