As pressures on residential construction supply chains and capacity ease, annual growth in construction costs has reduced to the lowest level in around seven years.
CoreLogic’s latest Cordell Construction Cost Index (CCCI) recorded a 0.8% rise in the fourth quarter of 2023. Despite a slight uptick in the pace of growth compared to each of the previous three quarters (0.4%-0.6%), it remained below the long-term average of 1.1%.
This brought the annual change to 2.4%, well below the 10-year average of 4.5%. This is the slowest annual rise since Q3 2016 (2.2%), and the second slowest since records began in Q4 2013.
CoreLogic chief property economist Kelvin Davidson said the heat has really come out of New Zealand’s residential construction sector over the past quarter.
“The industry itself is simply facing less pressure on overall capacity, compared to its peak at the end of 2022, where over-stretched builders struggled to keep up with workloads for new houses and renovations,” Davidson says.
“Records show material supply chains are easing further, with timber prices stabilising, and even some modest falls for metal products.”
“On the flipside however, there have been some price rises on general hardware, mainly imported products. It’s also possible that H1 insulation standards are exerting some upwards pressure, but it’s not possible to disentangle that effect from all the other influences.”
Looking ahead into 2024, Davidson says the pace of construction cost growth could remain subdued.
“The surge in net migration may help to restrain the pace of construction sector wage growth, which could also cap overall cost growth, considering that salaries account for 40-50% of the total cost of a new build, excluding land,” Davidson says.
“It wouldn’t be a surprise to see the annual rate of change in the CCCI run at 3-4% throughout the year, with builders still reasonably busy but not facing the intensity of recent years.”
He notes the decline in new dwelling consents suggests that this softer phase for activity could also be a pattern that remains for some time.
“Although it’s unlikely costs for households potentially looking to buy a new build or commission their own project will get any cheaper, at least costs shouldn’t be spiking higher either.
“Encouragingly, demand incentives such as lower deposit requirements under the LVRs for people to invest in new build properties should give developers some degree of confidence to keep bringing forward new projects.
“In the long run, this new supply is what we need to keep housing affordability under some kind of control,” he says.
CoreLogic researches, tracks and reports on materials and labour costs which flows through to its Cordell construction solutions to help businesses make more informed decisions, estimate rebuild and insurance quotes easily and, ultimately, appropriate risk effectively.
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.
To read the report, visit www.corelogic.co.nz/reports/cordell-construction-cost-index.
