Building activity falls for first time since Covid lockdowns

Building activity dropped off in the last part of last year, but the level of activity remains elevated – for now, economists say.

The volume of building work put in place was down 1.6% in the December 2022 quarter, compared with the previous quarter, according to the latest Stats NZ figures.

Residential building work fell 2.6%, while non-residential building work rose just 0.4%.

Stats NZ construction statistics manager Michel Heslop said the easing in residential building activity led to the first fall in the total volume of building work since the Covid-impacted September 2021 quarter.

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During the September 2021 quarter the country was at Covid alert level 4 for two weeks, while Auckland was at alert level 4 for five weeks.

The fall in activity partly reflected a decline in the number of new homes consented, he said.

There were 49,480 new homes consented in the year to January, but that was well below the peak of 51,015 recorded in the year to May 2022.

But while the volume of work was down, the value of the work in place rose to $34 billion in the year to December, a 20% annual increase.

Value estimates of building work include changes to building costs, such as material and labour costs, over time, and those costs have climbed in recent years.

Stats NZ figures showed that in the past year residential construction costs increased 13%, and non-residential costs increased 10%.

Westpac senior economist Satish Ranchhod said while building activity had eased back at the end of last year, it remained elevated at about 5.5% above the levels of the year before.

But capacity constraints, particularly labour shortages, were a handbrake on how quickly projects could be completed, and a peak in the building cycle was approaching, he said.

“Operating and financing costs have risen sharply over the past year, and at the same time, house prices are tumbling in many parts of the country.

“That means prospective buyers are increasingly nervous, and developers are cautious about bringing new projects to market.”

Builders and industry suppliers had reported those conditions were weighing on demand, with forward orders dropping off, he said.

“Going forward, we don’t expect a sudden drop-off in building activity, due to the number of projects already in train.

“But construction activity looks set to peel back through the latter part of 2023 and 2024 as current planned projects are completed, and fewer new projects come to market.”

Repair work following the recent storms would moderate that decline, but not completely offset it, he said.

Infometrics economist Joel Glynn said activity was clearly starting to slow, and that trend was likely to continue until 2025, but it would not drop off a cliff.

Not only did activity remain elevated on last year, it was up on pre-pandemic levels, with activity 11% higher than in December 2019, he said.

“A considerable amount of residential consents remain in the pipeline, which suggests residential construction activity will steadily ease over the next two to three years.

“But we expect cancellation rates will increase as house prices keep falling, and interest rates continue to rise, which could result in more substantial declines in residential building activity sooner.”

Upward momentum in non-residential construction also appeared to be slowing, although activity increased in the December quarter, he said.

“The types of building activity being done is shifting away from factory and storage building, as domestic and global supply chain pressures ease, towards publicly funded building activity, such as hospitals and social buildings.”