Market Report: New Zealand Construction Industry is Back

new zealand reconstruction

Image Credit: Rebuild Christchurch

Persistent housing shortages in Auckland and Canterbury and the gathering of pace in the Christchurch rebuild are fueling a recovery in the New Zealand construction industry which continues to gather momentum, with one prominent forecaster recently tipping a five-year boom period greater than the previous period of strong activity in 2004-2008.

Driven largely by a second-half recovery in housing, the overall value of building work put in place throughout New Zealand rose 8.3 per cent last year to come in at $NZ10.759 billion.

Furthermore, the pace at which new work is coming in continues to pick up. At 9,189, the seasonally adjusted number of new housing units (including apartments) approved for construction in the six months to February was well above that for the previous six months (8,297) and way above the 7,368 housing units approved in the six months to February 2012. Furthermore, even when the less buoyant non-residential sector is included, the overall dollar value of building authorisations granted over the past six months ($5.340 million) was well above that for the previous corresponding period in the six months to 2011.

At least one prominent forecaster expects the good times to continue. In its most recent Building and Construction in New Zealand 2013-2018 report, industry research firm BIS Shrapnel says it expects the overall dollar value of buildings authorisations over the next five years to exceed that of the most recent boom period spanning 2004 to 2008, with work on the Christchurch rebuild building up to a peak by 2015.

dwelling unit authorisations

In terms of housing, BIS says a number of factors will drive momentum going forward. First and most obvious is the need to demolish and rebuild as many as 8,000 ‘red-zone’ residential homes in the earthquake affected Canterbury region, where activity will rise between now and 2015 before tapering off. Then, there is the 9,300 sized housing deficiency in Auckland the forecaster reckons has resulted from five years of low building activity at a time when the population has continued to expand. This phenomenon will especially underpin activity in inner-city apartment developments, which the city is stressing in its long-term plan. Third, BIS reckons repairs on homes and schools throughout the Northern Island resulting from the leaky homes debacle could add $3 billion to 5 billion to total building value over the next five years. Finally and more broadly, net overseas migration of around 10,000 per year will underpin continued demand for more housing.

Outside of new housing, BIS also expects strong levels of activity in renovations of existing homes.

BIS expects the non-residential building sector to get a lift over the next five years from the earthquake rebuild as well as earthquake strengthening works of offices and schools in Wellington, though it acknowledges there is a downside risk to its forecast should these works be delayed.

The forecaster also expects increasing economic momentum to spur further leasing activity on the North Island which in turn will underpin new developments and refurbishments of warehouse, factory and office buildings. Indeed, BIS expects the total value of commercial and industrial building authorisations over the next five years to come in 35 per cent higher than in the five-year period just passed.

Not surprisingly, the build-up in activity of late has underpinned a rise in employment, where Statistics New Zealand figures indicate the number of full-time equivalent workers employed in the sector rose by 7.2 per cent last year. While the improvement is good news for workers and is welcome overall, it underscores concerns about potential labour constraints and upward pressure on wages as the Christchurch rebuild approaches peak activity – albeit with current employment levels remaining low by recent historic standards.

people employed chart

That highlights other challenges associated with upward pressure on costs for raw materials and capital equipment – albeit with increases in these areas currently sitting around a modest two per cent per annum. A shortage of residential land in Auckland, for example, could lead to significant price pressures in residential building there.

Fortunately, however, barring unforeseen circumstances, a stronger sales environment should generally allow profit margins to be maintained as output prices at least keep pace with costs.

By Andrew Heaton
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