While the CoreLogic Cordell Construction Cost Index (CCCI) recorded a an increase of 1.7% in the final quarter of last year - a significant drop from the record 3.4% increase in the three months to September – it still hit the new all-time high, surpassing the previous record of 9.6% set in the third quarter.
The CCCI report measures the rate of change of construction costs within the residential market for a typical, standard three-bedroom, two-bathroom brick and tile single storey dwelling.
Annual inflation for construction costs is expected to hold at about 10% for the first quarter of this year, says Kelvin Davidson CoreLogic chief property economist before easing over the rest of the year as the red-hot residential building sector finally starts to slow.
“However, in a market where existing house values are dropping, it may well be difficult for builders to keep pushing up new-build prices to compensate for higher costs. If so, the net result of continued increases in construction costs, even if at a slower pace, would be further pressure on construction firms’ profit margins,” he says.
“Longer term, annual new dwelling consents are expected to ease from around 50,000 per year to the 30-35,000 range, which sounds like a significant slowdown, but remains higher than in previous years.
Davidson says the residential construction sector has dealt with rapidly rising costs for more than 12 months and a drop in those numbers only started in the final quarter of last year.
“For most of last year, new dwelling consents remained high, with smaller dwellings – especially townhouses – becoming an even higher share of the total - nationally 56% in the year to October, and 77% in Auckland.
He warned even as new dwelling approvals slowed, the huge pipeline of consents that had already been granted will take time to be completed, providing builders and the industry with at least another six to 12 months of consistent work.
A surge in new builds, materials supply issues, and labour shortages, alongside completion delays, had contributed to the unprecedented increase to the cost of residential construction throughout 2022, the index shows.
“Although the supply chain issues for building materials, such as plasterboard, have eased considerably, overall capacity pressures are still a concern,” Davidson says.
“We can see the lingering strains clearly in the December quarter construction cost figures - 1.7% rise - which were the lowest for the year, however the index is still running above the normal increase of about 1% per quarter.”
Davidson says the elevated level of construction is partly due to the need to replenish stock levels to meet New Zealand’s future population growth, but also reflects the myriad of demand incentives available for new-builds, such as exemptions from the loan-to-value ratio rules and investors’ ability to claim mortgage interest deductibility.