HOUSING CRISIS: Construction costs rising at double the typical pace

PHOTO: Construction costs

Dwelling consents running at record highs coupled with supply chain disruptions and a shortage of materials has resulted in a continued strength in construction cost rises.

The Cordell Construction Cost Index (CCCI), formerly the Cordell Housing Index Price (CHIP), reveals a national increase of 1.6% in the three months to September 2021 down from the 2.2% rise in the previous quarter, but still well above the typical quarterly increase of about 0.8%.

On an annual basis, Aotearoa’s construction cost growth rose from 4.5% in the 12 months to Q2 2021 to 5.5% in 12 months to Q3, the fastest annual rate since Q1 2018 (when growth was already into a slowdown phase). Cordell data shows that timber prices, particularly structural timber and cladding, have been a key contributor to overall cost increases. Metal costs and products have also been a factor in the increases.

CoreLogic NZ’s Chief Property Economist, Kelvin Davidson, said it is likely that the construction industry will remain busy for some time to come.

“Cost pressures as shown by the CCCI may get worse before they get better. Indeed, anecdotal evidence suggests that the latest lockdowns will simply sustain the disruptions on supply chains and construction material costs.

“Investors are also now strongly incentivised to buy new builds, due to their exemption from the loan to value ratio rules and continued ability to claim mortgage interest as a deductible expense for the first 20 years of a property’s life.

“These tailwinds for new-build demand have all come at a time when we can’t import more skilled labour, so it’s a bit of a perfect storm, and will likely help to sustain some upwards pressure on construction costs”

However, Mr Davidson said there are some headwinds which should eventually come into play and ease construction cost pressures.

“Mortgage interest rate rises will likely impact new home demand along with the general cost growth itself which will feed back into softer activity,” he said.

The jump in construction costs comes at a time when CoreLogic is reporting a 28.8% rise in housing values nationally over the past year. Higher construction costs are likely to add to affordability challenges already at play across the established housing market.

“For anyone who is looking to build or to renovate, or for someone who owns a business involved in the residential construction industry, it means they are all likely to be facing significantly higher costs,” said Mr Davidson.

CoreLogic researches, tracks and reports on materials and labour costs which flows through its Cordell construction solutions to help businesses make better decisions, estimate rebuild and insurance quotes easily and, ultimately, appropriate risk effectively.

Tom Coad, CoreLogic NZ’s Head of Product, said rapidly rising construction costs mean home owners need to stay vigilant to ensure their insurance cover keeps pace.

“Under insurance becomes a real risk during periods of rapid growth in construction costs. Home owners can keep track of how construction cost changes would impact their own homes by using their insurer’s rebuild calculator,” said Mr Coad.

The CCCI report measures the rate of change of construction costs within the residential market and covers freestanding and semi-detached single and two storey homes.

A copy of the CCCI report can be read HERE: CoreLogic NZ CCCI Report Q3 2021 Nov