NZ construction inflation to slow as escalating costs damp demand

NZ construction inflation to slow as escalating costs damp demand. Photo: John Sefton

Construction inflation across New Zealand's main cities is expected to slow in coming years as escalating costs soften demand, according to an industry report.

Auckland experienced the biggest cost inflation last year, at 8 percent, which is forecast to slow to 6 percent this year, 3.5 percent next year and 3 percent in 2021, according to quantity surveying firm Rider Levett Bucknall's latest Oceania Report of tender prices. Christchurch is coming off its 2015 post-earthquake peak of 6 percent growth in tender prices, with increases this year expected to remain at 3 percent, matching last year, and shrinking to 2 percent next year. Meanwhile, Wellington tender costs are expected to lift 6 percent this year from 5.3 percent last year, before slowing to 4 percent next year and to 3 percent by 2021.

Construction costs in New Zealand have been rising at a faster pace than the country's overall inflation of 1.1 percent, underpinned by record tourism and migration levels. However labour shortages and escalating costs are expected to damp demand in the future, RLB said.

"Across New Zealand, escalation forecasts for 2018 remain elevated with all regions forecasting tender price index increases above current consumers price index levels," RLB Oceania chair Ewen McDonald said in a statement. "Moving forward, expectations are that escalation will decline in all cities.

"Auckland and Wellington’s escalation is forecast to fall 50 percent by 2021 to 3 percent, while Christchurch’s escalation will remain constant at 2 percent from 2019 onwards."

RLB noted that Auckland's construction market has been under resource pressure.

"The Auckland region continues to have strong growth through migration and tourism. Although numbers have cooled, there is still a pipeline of work to support the surge in population growth over the last few years," the report said.

"Moving forward, expectations for Auckland are that market forces will take effect and increasing costs will soften demand, thus easing escalation."

RLB said Auckland's construction market, particularly for projects worth more than $100 million is "severely stretched" and the withdrawal of the Fletcher Building and Interiors unit from bidding "leaves a significant gap in the market and the market’s capacity to deliver large complicated projects."

"The subcontractor market across the board is also under resource pressure and this is seen in poor tender responses and volatile pricing. The lack of skilled resources is affecting productivity and cost, slowing projects down and leading to higher preliminaries costs and late completion of projects. These market issues may dissuade new market entrants filling the void left by Fletcher."

In Christchurch, tender inflation is now stable and forecasts for 2019 onwards are expected to remain close to inflation at 2 percent, the report said.

"The Christchurch rebuild peak has now been reached with respect to both residential and commercial projects," it said.

"Construction escalation has slowed somewhat in the last period. Major and complex projects still see trade-related and extraordinary escalation spikes. There are still a number of major projects getting underway as well as those due for completion next year. This will continue to put demand on key trades for the foreseeable future and result in continuing tender price increases. Demand from other cities is also drawing some resources away from Christchurch as work becomes available."

In the capital city, Wellington continues to experience strong growth, with many projects committed while other larger projects are reaching completion, the report said.

"Building cost escalation is continuing to outstrip inflation levels by some margin. Subcontract resources are stretched and we are seeing significant price increases in various trades due more to a lack of competitive tension rather than market inflation," it said.

"Many companies are continuing to experience labour shortages due to a lack of personnel coming into the Wellington market given the prevailing conditions in most other regions of New Zealand. This level of workload has no precedent and also has no end in sight given the favourable economic conditions prevailing currently."

RLB's McDonald said construction sector firms continue to report acute labour shortages.

"Skilled labour is particularly hard to find, although shortages have eased slightly from levels seen in mid-2016," he said. "Migrants have helped alleviate labour shortages, with the number of technicians and trades’ workers moving to New Zealand on a work visa in recent years. Planned reductions in migration may impact on future escalation rates if skilled trade labour demand is not met."