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Home Construction Costs Surge By 2.2%

Residential construction costs rose by 2.2% in the June quarter according to CoreLogic’s Cordell Housing Index Price (CHIP), the largest increase ever recorded – Chief Property Economist Kelvin Davidson explains why.

The construction sector has been running at full capacity and pressures have been emerging for several months now. There have been reports of labour shortages in housing construction, as well as stress on supply chains and availability of materials.

This is now starting to flow through more clearly to the prices that builders are having to charge their clients. Where some suppliers had previously absorbed cost increases or substituted materials where possible, we are now seeing the costs passed on to the consumer.

This strong quarterly increase has now pushed the annual growth rate to 4.5%; a large jump from 3.3% in the 12 months to March 2021 and the highest annual increase since Q1 2019 (4.7%).

CoreLogic cites the number of new dwelling consents remains very high, driven by smaller dwellings such as townhouses, suggesting that there’s unlikely to be much let-up in cost pressures in the industry for some time.

In addition, work on consented alterations and additions is also running at the highest levels in over a decade, let alone any projects being done that don’t require consent.

We anticipate that the CHIP index for Q3 (and beyond) will show more price pressures, with the annual growth rate continuing to rise.

It’s difficult to put precise figures on how fast prices might rise, but what is clear is that anybody wanting to build a new house will be facing higher costs in future – which in turn would eventually start to crimp demand and therefore remove some of these pressures.

CoreLogic researches, tracks and reports on materials and labour costs which flows through its Cordell construction solutions to help businesses make better decisions, estimate rebuild and insurance quotes easily and, ultimately, appropriate risk effectively.

Tom Coad, CoreLogic NZ’s Head of Product, warns that while construction costs have been continually rising, the sudden increase in construction cost inflation highlights the need for homeowners to ensure their insurance cover keeps pace with these rising costs.

“All insurers provide rebuild calculators such as Cordell Sum Sure, which we have been updating to allow consumers to keep track on how these construction cost changes would impact on their own homes,” says Coad.

“As a homeowner, it is so important to make sure that your largest physical asset has the right level of insurance so you’re not left out of pocket or unable to rebuild or replace your home due to inadequate cover.

“In our experience, increasing sums insured by even a few hundred thousand can cost a lot less than you might think.”

As New Zealand’s economic upturn continues with most sectors expanding, inflation is now a key issue. This acceleration in house-building cost inflation is just another piece of ammunition for the RBNZ to hike interest rates as they try to ‘get ahead of the curve’ on keeping general price rises controlled.

The CHIP report measures the rate of change of construction costs within the residential market and covers freestanding and semi-detached single and two storey homes.

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