According to Rider Levett Bucknall’s (RLB) Forecast 110 report – New Zealand Trends in Property and Construction – the outlook for construction remains weak for the coming year, but there are signs of a pick-up in demand beyond 2025.
RLB’s Forecast 110 noted that near-term construction demand is soft. Construction activity fell slightly in the June 2024 quarter, reflecting a small decline in both residential and non-residential construction.
Activity indicators such as consent issuance and the latest NZIER Quarterly Survey of Business Opinion measure of architects’ activity in their own office point to a continued weak pipeline of construction across housing, commercial and government work for the coming year.
RLB Director Grant Watkins commented, “Beyond that though, architects are expecting an increase in housing and commercial construction in 1–2 years’ time based on work in their own office.”
“Whilst the near-term outlook for construction demand remains weak, we forecast population growth and lower interest rates to support a recovery in construction demand from late 2025,” he said.
Building activity trends
Construction activity was mixed across the regions, with weakness concentrated in the major centres in the North Island. In contrast, construction increased in the South Island, including Canterbury, as well as the rest of the North Island, excluding Auckland, Waikato and Wellington.
To the extent the negative impact of higher interest rates and public sector cutbacks have been most keenly felt in the main centres, this has weighed on construction demand. Nonetheless, Auckland remains the dominant driver of construction activity.
Building consents
According to RLB, a sharp decline in consent issuance for new education buildings remains a key driver of the weakness in non-residential construction demand for the year to August 2024.
Demand for the construction of new healthcare facilities has also fallen sharply over the past year. These declines have been partly offset by increased consent issuance for alterations to these types of buildings.
In contrast, there has been growth in consent issuance for both new and alterations to office space over the past year. This growth reflects stronger demand for office developments in Auckland.
Building consents by region
Across the regions, Waikato and Otago have been the key drivers of the weakness in non-residential construction demand over the past year. The weakness in non-residential consent issuance in Waikato has been broad-based across most sectors, but there was a particularly sharp decline in consent issuance for storage buildings.
Meanwhile, the weakness in Otago was largely driven by reduced consent issuance for healthcare facilities and offices. Improved prospects in the agriculture sector with the recovery in global dairy prices should support a recovery in non-residential construction demand in these regions.
To the extent our key dairy market is China, the slowing growth in the Chinese economy poses some downside risk to this recovery. In contrast, non-residential consent issuance in Wellington and Auckland increased over the past year.
The growth in non-residential construction demand in Wellington was driven by demand for offices and industrial buildings. This strength is surprising given the downbeat mood of the region in the face of public sector cutbacks.
Building costs
According to RLB, pricing power remains weak in the sector. Whilst cost pressures have intensified, the weak demand environment continues to put downward pressure on prices in the sector. This suggests further easing in construction cost inflation over the coming year.
Grant concluded, “We forecast non-residential construction cost inflation to remain soft for the coming year given the weak pipeline of non-residential construction.”
“However, there are signs that non-residential construction demand will pick up beyond 2025, and we expect this to support a recovery in non-residential construction cost inflation over the longer term,” he said.
RLB forecasts annual non-residential construction cost inflation to ease to just under 2.5 percent early next year before picking up from late 2025.
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