NZ construction costs fall for the first time in more than a decade

The decline marks a significant milestone in the history of the CCCI series, which tracks the cost to build a standard single-storey, three-bedroom, two-bathroom brick and tile standalone dwelling since 2012.

CoreLogic Chief Property Economist Kelvin Davidson said the decline follows the industry's completion of a surge in building consents and resolution of COVID-19 supply chain disruptions, with the subsequent quieter period reducing construction cost growth below long-term averages.

The outright fall in building costs in the second quarter also meant the annual growth rate slowed from 2.3% in Q1 2024 to 0.6%, a new record low for this indicator. The previous mark was 2.0% in Q2 2014.

“The downturn in workloads in the construction sector has eased the pressure on capacity and that’s flowed through to reduced building costs,” Mr Davidson said.

“Coupled with a slowdown in the growth of average hourly wage rates, the flattening of building materials costs has also caused a reversal in trends from the rapid growth in construction costs in the past few years.”

The CCCI recorded falls across several important materials, including structural steel and kitchen joinery. Costs for tapware and electrical light fixtures also fell.

Mr Davidson had anticipated that growth in the CCCI would be subdued and wasn’t shocked at the falls given the construction industry’s soft operating conditions.

“Construction costs spiked during 2022 due to lingering COVID-affected supply chain issues, as well as a boom in construction activity as dwelling consents peaked around that same period,” he said.

“Those factors have all now been resolved with material supply back to normal, dwelling consents falling and the pipeline of jobs coming to completion. This has alleviated significant pressure on the industry, freeing up capacity and reducing costs.”

The increased availability of established properties on the market is likely reducing demand for new builds, giving home buyers a wider selection and more options.

“Elevated stock levels among existing property listings means fewer households are going down the new-build path. It’s also possible the higher cost of a new-build compared to an established property could also be a deterrent, especially when general household finances are tight,” Mr Davidson said.

He added the recent changes to the Brightline Test and interest deductibility rules have also reduced the incentives for investors to look at new-builds.

The forecast for softer new dwelling consents and subdued house-building activity is likely to mean flat or further falls to overall construction costs in the next few quarters, Mr Davidson suggested.

New debt-to-income rules introduced by the RBNZ, effective from 1 July 2024, exempt construction loans from banking restrictions. This, along with existing loan-to-value exemptions, aims to encourage new home builds by making financing more accessible.

Mr Davidson said these measures are intended to stimulate residential construction and alleviate housing shortages, but significant increases in activity are unlikely.

“The exemptions and lower construction costs are good news for those considering new building projects or buying from developers,” he said.

“However, with dwelling consents down nearly 30%, the downturn could impact future housing supply. That said, the risks of widespread housing shortages re-emerging seem relatively low for now, especially since the Government is pushing so hard at present to increase housing supply.

“The hope is that more stable economic conditions and lower interest rates in 2025 will help revive house building activity.”

CoreLogic’s research, 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, measure risk effectively.

To read the report, visit www.corelogic.co.nz/reports/cordell-construction-cost-index

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