Building activity is likely to pick up in the back half of the year, economist says
Increased construction levels are yet another indicator of New Zealand's improving economy.
Residential building consents were up 2.6% in January, compared with the prior month, according to a new report from Westpac NZ. This is a reversal from December's declines of 5.6%.
Satish Ranchhod (pictured above left), senior economist at Westpac NZ, said the fluctuations can be attributed to normal monthly market movements.
"The real story here is the rates coming down, which is causing gains in housing and new development activity," he told New Zealand Adviser. "Financing costs have come down and that will be supporting new builds over the next few years."
Ranchhod predicted that new building activity is likely going to continue to gain traction in the back half of the year. The Westpac NZ report showed that for the 12 months leading up to January 2025, residential consent numbers were down -7.2% – a slow improvement from the previous year's declines of -9.8%
Ranchhod also pointed out that the low level of residential building consents – which fell sharply in 2022 and 2023 – has likely reached a bottom. For the last seven months, that annual level has been below 34,000.
"New Zealand saw a big increase in construction costs during the pandemic, as most countries did," Ranchhod said, which led to reduced demand for building consents.
But more recently, residential construction costs have stabilized. In the 12 months leading up to November 2024, residential construction costs were up just 1.5%, according to a report by QV CostBuilder. That's a marked difference from double digit increases in 2021 and 2022.
"Stabilizing construction costs are clearly good for the overall industry," said John Moody, chief financial officer at non-bank lender Basecorp NZ. "It's good for the development industry, as well, in terms of having greater visibility on what costs look like over the next 12-to-24-month period."
The risk, Moody pointed out, was New Zealand's falling property prices, which may have left some developers wary of taking on new projects.
"But there's still a need for new homes to keep up with population growth, especially in places like Auckland," Ranchhod said.
In the commercial space, building consents are mixed, with many businesses opening or renovating office spaces as they adjust to hybrid work conditions, while retail and hospitality sectors continue to struggle.
"Feedback we’ve heard from businesses indicates that they remain cautious about significant new capital expenditure in the near term," Ranchhod wrote in a note. "However, we expect that spending on new premises and other investment activity will gradually rise over the coming year as economic activity recovers."
Conflicting Forces
New Zealand's economy has been plagued with conflicting market forces in recent months, including rising unemployment rates and higher costs of living. At the same time, inflationary pressures appear to be subsiding and the country's official cash rate (OCR) was reduced by 50 basis points earlier this month. The market was flooded with even more optimism after the Reserve Bank of New Zealand (RBNZ) forecasted additional rate reductions throughout 2025.
Now, many market participants are left wondering if lower financing costs, mixed with housing shortages, will lead to a greater demand for construction.
"I think it really depends on what people are looking for," said April Hastilow (pictured above right), a Christchurch-based mortgage adviser at Opes Mortgages. "Some people are wanting a new build because it's a lower deposit. Some people are wanting a new build because they're easier to take care of. Other people are wanting land. Other people are wanting to be more central, which means maybe [buying] something existing."
In addition, Craig Pope, founder and mortgage adviser at Wellington-based Craig Pope Financial, pointed out that buying land and building is still quite expensive.
"It's easier for the likes of first home buyers to buy an existing house," he said.
"Obviously, some parts of the country have more affordable sections and more land and greater population density," Pope added. "But I have yet to see any great movement with people looking to build."
