Home building costs jump 10% from a year ago

1. Construction cost growth hits double digits

The CoreLogic Cordell Construction Cost Index released last week showed that a standard single-storey, three-bedroom, two-bathroom, brick and tile house cost 10% more to build (excluding land) in Q4 2022 than it did in late 2021 – a record pace of increase, reflecting the industry capacity pressures and materials shortages that applied for most of last year. However, house-building activity looks set to slow a bit this year (and in the following years too), which will take some heat out of costs. They’re unlikely to fall – which could mean a squeeze on developers’ margins (because final selling prices are facing downward pressure) – but at least costs may not rise as quickly in 2023.

2. Dwelling consents fall again (slightly)

Indeed, the more subdued outlook for construction activity and cost growth was bolstered (a little) by last week’s new dwelling consent data, which showed a fall of 1% in November compared to a year ago. That followed a 12% drop in October. It’s nothing dramatic yet, but two declines in a row does start to present slightly more convincing evidence that the anecdotes about a construction industry slowdown are starting to become real in the data. Given high house-building costs and high mortgage rates, it’s likely that fewer people will take the new-build path this year.

3. Employment was still rising in late 2022

The year has started positively for other key data releases, with Stats NZ’s filled jobs measure for November (released last week) showing a reasonable 0.2% monthly rise, after the same increase the previous month (upwardly revised from flat). The labour market will be key for how property performs this year – keeping in mind that the Reserve Bank is forecasting higher unemployment – so the latest result is good news for now. Indeed, it’s conceivable that if there were more skilled workers actually available to fill positions, employment growth might even be a bit stronger still.

CoreLogic chief economist Kelvin Davidson: “House-building activity looks set to slow a bit this year, which will take some heat out of costs.” Photo / Peter Meecham

4. Rents probably stayed pretty flat in December

On Thursday this week, Stats NZ will publish the rental price data for the final month of 2022, and I’d anticipate another sluggish result. The level of rents basically started to flat-line from around April last year, and this saw the annual growth rate drop from 6-7% in early 2022 to around 1% by November. The reduced ability to push through a rent increase is obviously another challenge for landlords, who are already dealing with other pressures such as low gross rental yields, higher compliance costs, and the removal of mortgage interest deductibility. On the other hand, of course, flat rents are great for tenants.

5. Net migration positive again in November?

Then on Friday, we’ll get the latest net migration data from Stats NZ – which could at least be one bright spot for landlords. After all, over the past 3-4 months we’ve seen a sharp pick-up in net new arrivals to New Zealand, which has outweighed Kiwi departures, and pushed the overall migration balance back into the black. It seems likely that this would have continued in November, and should run into 2023 as well. Clearly, some of this extra property demand will go into the owner-occupied segment. But many new migrants will be tenants, at least for a start, proving some kind of support for rents.

- Kelvin Davidson is chief economist at property insights firm CoreLogic

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