Though overall levels of activity and employment in the New Zealand construction industry remain weak, signs of a moderate pickup in residential building continue and the overall market is expected to improve as the Christchurch rebuild gathers momentum.
Furthermore, while construction costs are back on the rise – albeit at modest levels – they are rising more slowly than selling prices, meaning that pressure on margins is abating.
The following is a snapshot of current market conditions with regard to overall market activity, housing and residential construction, non-residential construction, construction sector employment and construction profit margins and costs.
Overall construction activity
For now, overall levels of construction activity throughout New Zealand remain subdued. At $2.496 billion, the seasonally adjusted value of building work put in place for the March quarter remains low by historic standards.
However, as the pace at which new building work is coming in gathers speed, there are signs of moderately better times ahead. At $2.402 billion, the overall value dollar value of all building consents issued throughout the country during the three months to May (not seasonally adjusted) was up 13.89 per cent when compared with the same period last year.
To be sure, there are some caveats to this. Non-residential building remaining subdued and the Department of Building and Housing says it expects consent values to flatten out over the next six months.
Still, overall activity levels are expected to pick up at a modest pace as the Christchurch rebuild continues to gather momentum.
At 4,126, the seasonally adjusted number of consents issued for the construction of new dwelling units, including apartments, in the three months to May this year is well up on the 3,798 units (seasonally adjusted) approved in the three months prior to that and is up by almost a third when compared to the equivalent period last year (3,110).
That means the pace at which new residential work is coming in has picked up dramatically and near-term prospects for residential construction are as good as they have been in years – though the Department of Building and Housing expects consent numbers to flatten out throughout the second half of the year.
Driving the pickup is strong demand and an undersupply of housing in Auckland, plus rebuilding in Christchurch. Those two cities account for almost all of the aforementioned consent increases.
In terms of house prices and rents, the Department says the overall market remains stable and is expected to remain that way, with affordability levels generally improving and rent increases expected to stabilise over the next six months.
The exceptions, of course, are Auckland and Christchurch, where a lack of housing supply and the rebuilding efforts, respectively, are contributing to higher house prices and rent increases compared to elsewhere in the country.
Thus far, the recovery in residential construction has not spread to the non-residential sector.
Indeed, compared with last year ($946 million) and the year before ($971 million) the total dollar value of non-residential building consents issued during the three months to March ($876 million – not seasonally adjusted) was well down, meaning the pace at which new work is coming in in this sector is subdued at best.
The industry’s labour market remains flat, with employment rates at relatively low levels compared to recent history and the current rate of job growth for the construction industry well below the average growth rate recorded across all industries.
Once the major rebuilding work at Christchurch begins, however, the Department of Building and Housing says it expects employment conditions to improve.
One interesting facet about the state’s labour market relates to the numbers of licensed practitioners in various classes throughout the country.
As of March this year, all forms of restricted building work have had to be carried out by a Licensed Building Practitioner.
While the Department says it has met its target for the number of licenses that have been issued so far, a shortage of licensed practitioners in the external plastering category was evident across the country while shortages of those in the foundation class existed throughout most of the South Island.
Profit margins/Construction costs
Throughout most of the past seven years, input prices have risen faster than output prices, placing enormous pressure on margins.
Fortunately, however, this trend has reversed over the past year, meaning that the pressure on margins is now starting to abate – albeit with costs expected to rise at a faster pace going forward as demand for raw materials increases in response to the Christchurch rebuild.
After falling throughout most of 2009-10, prices for capital goods are now back on the rise. Still, at aroundtwo per cent, the pace of this increase is manageable from the industry’s viewpoint for the time being.