Residential construction costs continue to rise, index reveals

Residential construction costs continue to accelerate as building recovery looks to gather pace.

"Construction costs aren't cheap by any means, but the industry isn't seeing the rapid increases we experienced through 2021 and 2022," Cotality NZ chief property economist Kelvin Davidson said.

The latest Cordell Construction Cost Index (CCCI) indicates residential construction costs rose 1.1 percent in the three months to June, up from 1.0 percent in the March quarter and broadly in line with the long-term quarterly average.

However, annual cost growth accelerated to 3.5 percent, from 3.0 percent in the previous quarter, marking the strongest annual increase since mid-2023, though still below the long-term average of around 4 percent.

Davidson said the data suggests the period of unusually subdued construction cost growth had begun to fade.

However, he said construction costs were likely to come under further upward pressure as the pipeline of approved projects continued to grow.

"Construction costs aren't surging again, but conditions are becoming less favourable for builders and households, who may have been hoping build costs would soften further.

"A busier construction sector is ultimately positive for housing supply, even if it brings some modest upward pressure on build costs."

He said the construction sector was emerging from a prolonged downturn, with more projects beginning to move ahead after a significant lift in dwelling consents over recent months.

"As construction activity starts to recover, quarterly growth remains close to its long-run average, but the annual rate has accelerated for three consecutive quarters. That suggests the exceptionally quiet period for construction cost inflation is probably behind us."

While consents didn't necessarily result in building activity, Davidson said it was a positive sign for builders.

Still, the annual number of dwelling consents had risen to more than 39,000 from about 34,000 last year.

"There must be people signing up to new houses, or else you wouldn't be seeing more new dwelling consents coming through," Davidson said.

"So there are some people feeling a bit more optimistic, but at the same time, as I say, not necessarily expecting a boom because the household sector is still fairly cautious."

Other industry commentators were less positive about the outlook with a short pipeline of just three to six months of work.

Recovery brings fresh cost pressures

Alongside stronger domestic activity, global events also flowed through to impact construction costs.

The ongoing conflict in the Middle East was driving up oil prices and leading to higher transport costs, while suppliers were reporting price hikes on several building materials.

Cordell's latest analysis identified increases across structural steel, plumbing components, insulation and aluminium roofing accessories, with several suppliers indicating further increases may follow if global uncertainty persists.

"Builders are still operating in a competitive market where existing house prices have been flat or only rising modestly, so there's limited ability to pass higher costs directly on to customers," he said.

"That means many firms are absorbing some of those increases through tighter margins rather than significantly increasing contract prices."

Still, he said the uncertainty would continue as long as the war in Iran persists.