The construction sector has been partially held up by infrastructure construction expenditure, as building activity has remained weak. Any earlier recovery in the housing market appears to have stalled, and recent residential building activity has remained sluggish.
Softening building activity
Meanwhile, softening building activity in the non-residential sector has been led by the social, cultural and religious building sector, where activity level has dropped off following the commencement of sport stadiums.
The slow pace of economic recovery combined with the RBNZ’s interest rate hikes to normalise lending rates, and the stalled housing recovery has led consumers to turn cautious, as reflected by the continued sluggishness in the retail trade and housing market.
Although the national house prices have remained relatively stable, REINZ’s data shows residential property transactions in October 2010 have fallen to the lowest level in more than a decade, dipping to below 4000 — for the second time this year — after the record low of 3666 sales recorded in January 2010.
The slow economic recovery, due to weak economic growth in developed countries, will continue to weigh on consumer sentiment. Hence, despite improved home affordability, new housing demand is expected to remain mostly subdued through the 2011 March quarter at least.
We expect the recovery to gather momentum in the second half of 2011, supported by an unleashing of pent-up housing demand, which will be aided by improved affordability following personal tax cuts from October 2010.
Dwelling building consents are expected to turn around in the 2011 March quarter, boosted mainly by the reconstruction of quake-damaged properties in the Canterbury region.
As the economic recovery gets under way, the building activity rebound is expected to gather pace over 2011, and will be further underpinned by the repair of leaky homes.
A developing undersupply of housing over the next 18 to 24 months will sustain the housing market, which will witness house prices moving from a slow recovery mode into a growth trajectory, as housing demand picks up on the back of a strong economy driving employment and wages growth over the latter part of this period.
The housing market will be underpinned by continued net overseas migration, albeit at a slower growth rate, and reasonably better home loan affordability due to lower variable mortgage rates compared to the mortgage rates in early 2008.
The upturn in the non-residential building sector is not expected to be as robust as the residential sector upturn, as the downturn in non-residential activity has not been as steep either.
Over the past five years, commercial and industrial authorisation value had fluctuated between NZ$1.8 billion and NZ$2.3 billion per annum.
This is mainly due to developer cautiousness in undertaking office projects, in particular only after obtaining an anchor tenant or a certain level of pre-commitment leases.
As a result, the commercial property sector is not experiencing as large an oversupply as it did in the 1980s.
Positive growth in commercial and industrial building activity between 2011 and 2013 will offset weaker social and institutional building activity, as social, cultural and religious building activity is impacted by a drop-off in sports stadium-related projects.
Civil engineering sector growth over the coming years will continue to be driven by road construction.
However, investment in other sectors such as rail, utilities and telecommunication sectors is expected to continue strongly as well.