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CoreLogic NZ releases September quarter construction update

CoreLogic NZ releases September quarter construction update in its latest CHIP

Report (https://www.corelogic.co.nz/reports/cordell-housing-index-price-chip)

Nick Goodall – CoreLogic Head of Research writes:

Construction activity across New Zealand remains very high and that’s putting pressure on labour capacity in the industry, as well as materials costs. Indeed, after a more subdued result for the second quarter (0.6% rise), construction cost inflation on the CHIP index rebounded in the three months to September, coming in at 1.0% for the quarter.

This left the annual rate of cost inflation at 4.3%, unchanged from Q2 and down a touch from 4.5% the same time a year ago. However, that’s still a fairly rapid rate of cost growth – for context, over the three years from 2014 to 2016, it averaged just 2.8%.

On top of that, compared to cost/price inflation across the economy as a whole, the construction sector is under more pressure. Indeed, consumer price inflation for the third quarter was 1.5% annually, so construction costs are basically rising at three times the rate of general inflation.

That’s not surprising, when you consider how busy the industry is to keep pace with the demand for new-build housing. In the year to August 2019, there were about 35,660 consents for new dwelling units across New Zealand, the highest level since the first half of the 1970s. And it’s not just new housing either – consents for alterations & additions are also at historical highs.

Non-residential construction activity is pretty strong too. In the year to June 2019, the value of new work in this sector was $6.6bn, up by about $800m (or 15%) from the previous year. Shops, restaurants & bars, and storage buildings, were key contributors to the latest increase in activity.

One early indicator of how construction activity may move in the near term is ready-mixed concrete production, and after a lull in 2018, this sector has picked up again – production in the year to June 2019 was 2.7% higher than a year earlier, the strongest pace of growth in two years. That indicates further demand for buildings is in the pipeline.

Overall, the construction industry remains very busy and that is maintaining upwards pressure on costs. It’s hard to see this pressure being alleviated to any significant degree in the near term.

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