Building activity continues to increase even as rising costs start to bite

Property / news

In the 12 months to June residential building costs rose 17% while non-residential building costs were up 11%

5th Sep 22, 11:27am by Greg Ninness

The amount of building work being undertaken continues to increase, even as cost pressures rise.

The latest Value of Building Work Survey by Statistics NZ estimates that $8.413 billion of new building work was commenced in the second quarter of this year.

That was up 9.1% compared to the first quarter and up 18.7% compared to the second quarter of last year.

It included $5.802 billion of residential building work, up 8.6% compared to the first quarter and up 20.5% compared to the second quarter of last year.

Another $2.611 billion of non-residential building work was commenced in the second quarter of this year, up 10.3% compared to the first quarter and up 14.8% compared to the second quarter of last year.

However much of the increase in the value of work was driven by rising costs rather than an increase in activity, with residential building costs rising 4.2% between the first and second quarters of this year and non-residential building costs rising by 3.6% over the same period.

When the effects of those cost increases is removed, new residential building activity increased by 3.2% in the June quarter compared to the March quarter of this year, non-residential building activity was up 1.6% over the same period and overall new building activity was up by 2.6%.

In the year to June 2022 the total value of building work commenced was $30.92 billion, up 12.4% compared to the year to June 2021.

Over the same 12 month period residential building costs increased by 17% and non-residential building costs were up 11%.

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18 Comments

by Smudge02 | 5th Sep 22, 11:52am 1662335555

When you measure the increases in dollars I guess the true mechanics of the industry are hidden somewhat behind massive increases in building costs. I can't for the life of me see how the construction industry is heading for anything but a large decline? Cost of building is insane/unsustainable, cost of borrowing rising, high inflation, property falling???

by Pa1nter | 5th Sep 22, 12:03pm 1662336185

There's been less projects being completed over the past 2 years, and a lot of excess demand in non residential construction that hasn't even broken ground yet. A lot of activity in the construction sector is years in the making so doesn't directly correlate with whatever current housing crisis is going on.

by blobbles | 5th Sep 22, 11:43am 1662335008

Because it takes so long to build in this country (we are already at year 2 and about to start), this data will lag quite significantly. The real pressure will hit next year as all of us building start having to pay the bill.

by J.C. | 5th Sep 22, 11:50am 1662335404

This gels with me. A bit of the ol' lagging data phenomenon.

by Advisor | 5th Sep 22, 11:52am 1662335541

Lagging indicator: the price drop is more recent but developers commencing projects in the June quarter would have locked buyers in on late-2021 early-2022 peak prices.

High building costs would put a small dent on their crazy margins but far from losing confidence in planned projects.

A townhouse project in my neighbourhood broke ground in mid-June. They are twelve multiple 1 to 2-bedroom boxes where a 3-bdr house nicely sat, all sold in the $750-920k price range. No parking, no common facilities, only enough outdoor space to store your council bins.

At those ridiculous prices, a double-digit uptick in construction costs would be better classified as mild inconvenience to the developer.

by J.C. | 5th Sep 22, 11:51am 1662335501

A townhouse project in my neighbourhood broke ground in mid-June. They are stacking multiple 1 to 2-bedroom boxes already sold in the $750-920k price range. No parking, no common facilities, only enough outdoor space to store your council bins.

Like watching a procession of innocent sheep to the slaughter

by Advisor | 5th Sep 22, 12:01pm 1662336068

That's right - and to extend your analogy, the procession is being led to the slaughter by the government trying to spruik up the economy on meat exports.

Once this lot is all chopped up, they will bring in more sheeple from overseas.

by J.C. | 5th Sep 22, 12:42pm 1662338548

I posted this before but popn Ponzi countries Aussie and Canada have performed less well than Japan on growth in per capita GDP since the GFC. NZ has outperformed all of them.

https://cis.org/Camarota/There-No-Evidence-Population-Growth-Drives-Cap…

by Advisor | 5th Sep 22, 3:15pm 1662347745

Such a small difference can be written off on the basis of low-base effect - our per capita GDP is 15-20% smaller than theirs.

Also, will be interesting to see how much of that "growth" is just the oversized housing sector within each of those national economies. We might actually find out early to mid next year.

by J.C. | 5th Sep 22, 3:17pm 1662347872

I think we can safely assume that Japan's GDP is more weighted towards industrial and manuf output. Maybe not as great as one may think.

by Brutus Iscariot | 5th Sep 22, 12:33pm 1662338009

If prices drop sufficiently, buyers have an incentive to forfeit their deposit rather than stick it out on a vastly overpriced asset.

by HouseMouse | 5th Sep 22, 12:40pm 1662338410

Yep but on a 10% deposit that will still often be a very decent chunk of money…

by Dale Smith | 5th Sep 22, 2:12pm 1662343949

And the developers will sue them for specific performance, so there is a bigger incentive to settle regardless.

by HouseMouse | 5th Sep 22, 12:39pm 1662338342

Yep so that is going to be part of the last round of building in this mad bubble. As I have said before, this is the last role of the dice, there will be a large number of completions in late 2022, then it’s going to start falling away in early 2023.

Purchasers signing up for those would have been purchasing late 2021 when:

- price falls hadn’t really started

- interest rates had not yet risen much

by Dale Smith | 5th Sep 22, 2:06pm 1662343589

'twelve multiple 1 to 2-bedroom boxes where a 3-bdr house nicely sat and only enough outdoor space to store your council bins.'

If you want a laugh, turn up on bin day, and see them competing for curb space with pedestrians and all the cars trying to find a parking spot due to no on-site parking.

by DIYman | 5th Sep 22, 12:45pm 1662338711

As a long term property investor, I am currently building three rental houses. Material costs increased for a while. One is almost ready for its final inspection, one has the roof going on next week, and the other one is almost excavated, hit a bit of hard rock in one corner. Might have to redesign the founds.

There was an intial lag in price rises, for example aluminium joinery prices were slow to react to increasing spot aluminium prices, then it took off, and now it seems to have stabilised, but not dropped.

The same applied to concrete, and steel. As long as labour doesn't take off, we will carry on, but if they do, we will do the work ourselves, and finish them one by one.

by J.C. | 5th Sep 22, 2:44pm 1662345873

New Zealand’s construction industry is feeling the financial crunch, with a disproportionate number of liquidations and rising number of credit defaults in the sector, according to new figures.

According to an insolvency litigator, dozens of property developers are also trying to back out on deals worth millions of dollars as those projects are no longer as viable due to increased costs and sliding land values.

https://www.newsroom.co.nz/dark-days-continue-for-struggling-new-zealan…

by HouseMouse | 5th Sep 22, 4:35pm 1662352555

Thanks for that link. Yep it’s well and truly started, just as I predicted from early last year.

By this time next year the sector will be in an almighty slump.