Construction activity rises

Total activity rose by 3.2% in the March quarter - well ahead of the average market pick of only 0.5% growth.

Stats New Zealand’s figures show underlying March’s rise was a 3.2% lift in residential work, as well as a 2.7% increase in non-residential construction.

The supercharged construction boom is expected to continue for the next few years, but staff and materials shortages are acting as a handbrake and costs are rising rapidly.

Strength has been widespread, with a particularly large amount of work in train in Auckland.

Westpac senior economist Satish Ranchhod expects building activity will remain at elevated levels, with particular strength in residential construction.

While building consents have been running at record levels, they took a dive in April, down 30% on March figures, but up 6.9% compared to the same month last year. In the year to April 50,583 consents were issued throughout the country.

Most of the drop was for apartments, down 44% compared to the same month last year and retirement village units, down 42%.

The long-term trend is for terraced housing - also known as townhouses - and they are nearly at the same number of consents as stand-alone houses

While consents drop at this time of year, shortages of materials and labour have been a handbrake on how quickly projects can be completed with completion times stretching out.

“That’s left the country with a large and growing pipeline of work that will continue to support construction activity for some time yet,” says Ranchhod.

However, conditions in the construction sector are changing. Costs for materials and labour have skyrocketed. Interest rates have also risen sharply, after the OCR was raised twice in the past three months by 50 basis points to sit at 2%. 

Ranchhod says Westpac expects that combination of headwinds will be a drag on the number of new projects coming to market over the next few years.

“We have already seen house prices and sales dropping back.” The Reserve Bank is expecting a total fall of 14% inhouse prices by early 2024. Other trading banks have predicted a 10-15% fall.

“There’s also been growing pressure on construction margins, with many firms feeling the pinch in their balance sheets,” says Ranchhod.

“That doesn’t mean that a collapse in building activity is imminent. In fact, recent talks with businesses have highlighted continued firm demand. With so many projects in train, we expect to see building activity continuing to rise over the coming months.”

He says capacity constraints will limit the extent of further rises from the existing elevated levels. “As we approach the middle part of the decade, we are likely to see activity starting to ease back.”

Looking across the non-residential space, Ranchhod says the outlook for construction is mixed across segments:

“We’re continuing to see strength in the industrial and ‘big box’ retailing segments; there is also a large number of infrastructure projects planned; and, the outlook for office and strip retailing is softer.

“We expect those trends to continue over the coming year and with interest rates on the rise and economic growth set to cool, it’s likely developers will be more cautious about bringing new projects to market.”