Costs impact on consents

Friday 2 March 2018

Rising construction costs are putting a brake on construction activity and that’s being reflected in muted growth in consents issuance.

By Miriam Bell

New Statistics NZ data shows there were 1,916 new dwellings consents issued nationwide in January which, once seasonally adjusted, was a modest rise of 0.2% on December 2017.

This comes on the back of recent volatility: there was a 9.4% increase in consents issuance issuance in November followed by a 9.5% fall in December.

Stats NZ construction statistics manager Melissa McKenzie says that recent volatility aside, overall consent numbers are fairly flat, and levels remain below both recent and historic peaks.

But January is typically a quiet month for consents and this January was up on the previous few, she says.

“Further, there were 31,251 homes consented in New Zealand in the year ended January 2018, up 3.7% from the previous January year, with the growth driven by more consents for apartments.”

In supply-strapped Auckland, 718 new dwellings were consented in January.

This is down from the average of 900 consents a month over the past year but up on January 2017 when 512 new dwellings were consented.

In the year ended January 2018, Auckland consented 11,073 new homes.

While economists still see an upward trend in consents issuances, they are concerned about the impact of cost pressures in the construction industry.

Westpac senior economist Satish Ranchhod says it is worth noting that annual consent issuance in Auckland remains firm and that, over the past year, was at its highest level since 2005.

They expect that the overall level of residential building activity will remain elevated for some time and that it is set to increase at a gradual pace over the next few years, he says.

“But, as we’ve highlighted for some time, rising costs, as well as difficulties sourcing skilled labour and credit have provided a brake on activity.

“Consistent with this, annual consent issuance has failed to break materially higher over the past year.”

ASB economists agree, saying residential activity looks to have weakened on a trend basis despite the slight January lift in consent issuance.

They say the change in government and uncertainty around the new KiwiBuild policy is likely to have contributed to a decline in consents, as some developers may hold back on construction plans.

“As such, there is there is the strong possibility that this lull is temporary. But, with net immigration remaining elevated, the pipeline of future work looks to be growing. 

“This appears to be particularly acute in Auckland and Wellington, where we expect tight housing supply will likely lead to ongoing pressure on rents, and to a lesser extent house prices.”

They remain concerned about whether there is sufficient capacity in the sector to be able to meet this higher activity, while containing cost pressures in the sector.

“Our estimates suggest that annual residential construction cost inflation rose to around 6.5% in the 3-months to February.”

This situation is of particular concern in Auckland which is generally estimated to have a shortage of around 35,000 homes.

That means the city needs to have at least 11,000 to 12,000 new dwellings built each year for supply to keep pace with demand.

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