Pressure keeps building, blowing costs up
The cost of building a house increased by the highest rate in two years in the March quarter and it is likely to get more expensive as industry pressures bite, an economist says.
Corelogic’s Cordell Housing Index showed that residential construction costs went up by 1.3 per cent in the March quarter.
That was the highest rate of construction cost inflation since the first quarter of 2019 and well above the 0.6 and 0.4 per cent increases recorded over the third and fourth quarters of last year.
The annual growth rate of construction costs has also started to rise, after it dropped from a peak of 6.9 per cent in late 2017 to less than 3 per cent at the end of last year.
In the first quarter of this year, the annual growth rate rose to 3.3 per cent, which was more than double the Consumer Price Index rate of 1.5 per cent in the final quarter of last year.
Corelogic chief property economist Kelvin Davidson said construction costs had passed a turning point and the momentum was now upwards, with early indicators suggesting construction costs would continue to increase.
‘‘We may now be seeing the clear impact of a busy construction sector flowing through to faster cost rises,’’ Davidson said.
Industry capacity constraints and supply shortages would lead to higher material and labour costs, along with shortages and product substitutions. That would have an ongoing effect on the cost of building, he said.
‘‘When combined with potential Covid-related shipping problems, and also the recent publicity about shortages of structural timber domestically, the potential for faster and greater cost rises is accentuated.’’
Additionally, demand pressures were unlikely to let up in the near future. Davidson said listings of existing properties remained tight, which was pushing people towards building new homes or renovating their current ones.
‘‘The Government’s recent tax policy changes, which incentivise investors to target new-build properties, could well add further demand to the sector and place more pressure on capacity and costs.’’
If next week’s Budget included measures aimed at lifting housing supply as expected, it could also result in competition between government builders and the private sector for scarce resources, Davidson said. ‘‘The upshot is that construction costs are not likely to decrease any time soon.’’
Jeremy Gray, of Builderscrack. co.nz, said while the cost of materials had increased, the rates charged by tradespeople had not gone up disproportionally.
Lifting prices risked losing work to competitors, he said. ‘‘But if this pressure on the industry continues, that is likely to change and we will start to see some increases in tradies’ fees.’’