Red flag over cost inflation
Red flags are being raised about construction cost inflation.
They came as the Ministry of Business, Innovation and Employment (MBIE) issued an optimistic report, National Construction Pipeline 2018,
forecasting growth in the construction industry to steadily rise over the next six years rather than follow a boom-bust cycle.
But property consultancy Rider Levett Bucknall (RLB) forecasts construction cost inflation to lift to about 4.6 per cent in early 2019 before moderating to 4 per cent by the end of that year.
‘‘Beyond that we expect annual construction cost inflation to ease to about 3.5 per cent in late 2020 as capacity pressures ease.’’
The exit of Fletcher Building from the construction of nonresidential buildings was increasing uncertainty over the degree of construction cost escalation.
RLB also questioned the capacity of the industry. The company’s Wellington director, Grant Watkins, said the fragmented nature of the construction sector meant that builders were grappling with low operating margins, labour shortages and difficulty accessing finance.
‘‘Many smaller and mid-sized construction companies also face the challenge of cashflow issues, with delays in payment and completion of projects having a shortterm effect on their bottom line.’’
In the 2018 report, construction and building work is forecast to be worth $42 billion in 2023, three years later than forecast a year ago.
The 2017 report got it wrong on construction growth for that year. It fell by 0.3 per cent rather than growing by 10 per cent as the
2017 report forecast. Construction growth from
2018-23 is now expected to be ‘‘moderate and sustained’’, the 2018 report says.
It was the sixth annual report since they began in 2013 and was commissioned by MBIE, the Building Research Association of New Zealand (BRANZ) and economic consultancy Pacifecon.
The reports looked at construction work in the residential, non-residential and infrastructure sectors.
Auckland was a clear winner, with sustained year-on-year growth projected in the building of thousands of homes and multiunit dwellings, offices, shops, hotels, and industrial buildings.
Canterbury’s post-earthquake construction boom had peaked and its residential and nonresidential construction was set to decrease.
Wellington will see strong growth in residential building while non-residential will ease off. It was tipped to have the strongest residential building growth of any region, at 65 per cent, to $2.5b by 2023.
Only three regions will enjoy growth in non-residential construction work in the six-year period, the report said. They were Auckland, Waikato and Bay of Plenty.
The rest of New Zealand was expected to see decreasing nonresidential building in the six years.
In Canterbury, non-residential building peaked in 2016 at $2.6b and was expected to fall more, by
41 per cent, to $1.2b in 2023. In Waikato and Bay of Plenty, non-residential building was forecast to grow by 26 per cent in
2018 and remain at this level until
2023.