Building growth on ice despite demand
A building expert says New Zealand’s construction industry is like a factory that cannot turn out houses any faster, as new data suggests the industry has struck ‘‘peak construction’’.
Data on building work show residential and non-residential work were on the decline in the June quarter, falling 0.5 per cent on the previous three months.
The numbers were ‘‘surprising’’ given a sharp 3.3 per cent contraction in the previous quarter, ANZ economist Natalie Denne said.
‘‘While the level of building activity is elevated, and firms continue to report that they are extremely busy, what is clear is that the construction sector is struggling to grow further.
‘‘Capacity, cost and capital constraints are acting as caps.’’
Professor John Tookey, head of the built environment department at AUT University, said only two things would change the situation: an increase in workers or a change in the industry’s productivity.
It was like a car factory: materials could be supplied, workers could work longer hours, ‘‘but it’s physically only capable of delivering so many vehicles’’.
"It's really important for New Zealand that those bigger commercial firms are able to make a reasonable profit so they can invest back into their business." Registered Master Builders chief executive David Kelly, right
‘‘We’re at the capacity of the factory now, and unless you reengineer the factory to have additional production lines or whatever, the capacity is finite.’’
Political parties could make statements that they were going to build more houses, Tookey said, but ‘‘it doesn’t change capacity in the factory’’.
Tookey, who is part of a government group studying better housing, is calling for incentives to get building companies to adopt smarter processes.
‘‘[We need] major producers to invest in prefabrication – which is, by the way, the only way we’re going to increase those numbers,’’ he said.
There was ‘‘an inertia that exists in the building industry’’.
‘‘If we changed everything today, it’s going to be three or four years before you see any increase.’’
David Kelly, chief executive of the Registered Master Builders Federation, said prefabricated or off-site construction would be part of the solution but such methods relied on certainty and scale.
‘‘One of the areas that could potentially help that is Housing NZ’s programme of work. They’ve got a lot of work coming out over the next few years.’’
Slow growth was a concern in Auckland, but so was the viability of major contractors working off ‘‘pretty thin margins’’.
‘‘It’s really important for New Zealand that those bigger commercial firms are able to make a reasonable profit so they can invest back into their business,’’ Kelly said. ‘‘If their margins are too thin, they will cut costs.’’
Economists said the building activity figures followed a weak March quarter, which had been put down partly to poor weather.
Growth in overall building activity has declined 1.2 per cent in the past year.
Residential work by volume improved 1.6 per cent, but nonresidential building work was down 5 per cent, having fallen for two quarters.
Regionally, the June quarter was mixed. Levels of activity in Auckland rose 4.8 per cent, boosted by an 18 per cent jump in nonresidential work.
In Waikato, building activity rose 2.2 per cent, while regional South Island was up 11 per cent.
However, building activity eased in Wellington, regional North Island and Canterbury, where it fell 4 per cent.
‘‘Reconstruction in Canterbury is continuing,’’ Westpac’s Satish Ranchhod said.
‘‘But seven years on from the initial earthquake, much of the planned work is now complete … Canterbury’s home building sector is gradually transitioning to new post-rebuild level of activity.’’
Westpac had been expecting a 4 per cent rise in activity in June, not a fall of 0.5 per cent, and while there was a large pipeline of work coming, Ranchhod believed the pace of building would improve gradually over the coming year.
Outside Auckland and Canterbury, he noted spending on residential construction was up close to 5 per cent over the June quarter.
Non-residential construction eased 0.7 per cent in the June quarter. However, there was a fair amount of reconstruction activity from the Canterbury and Kaikoura earthquakes, which was expected to continue for several years.