Homebuilding prices growing at second-slowest rate on record

Residential construction costs have almost plateaued, which will be welcome news to anyone thinking about building a property.

Prices rose in the March quarter by just 0.3%, compared to 0.6% in the December quarter and well below the long-term quarterly average of 1.0%, according to the Cordell Construction Cost Index (CCCI).

As a result, annual price growth was just 0.9% in the March quarter – the second-lowest on record – compared to the long-term average of 4.2%.

The CCCI is a quarterly report that measures the cost to build a 200sqm, three-bedroom, two-bathroom, single-storey, brick-and-tile house.

Normal service has resumed

CoreLogic NZ Chief Property Economist Kelvin Davidson said the market had experienced an enormous shift since the construction boom that occurred during the pandemic, when annual price growth peaked at 10.4% in 2022.

“After several years of intense upward pressure, construction costs have now settled into a much slower rate of growth. But this is a moderation, not a retreat. Labour doesn't tend to get cheaper, and while materials pricing has flattened out, we’re not seeing any decline in the overall cost to build,” he said.

Mr Davidson said the building sector had returned to more normal patterns after several years of disruption. 

“We’re well past the extremes of 2021 and 2022, where costs surged across the board. These days, we’re seeing more nuanced movements, driven by specific supply and demand factors rather than industry-wide pressure,” he said.

Mr Davidson noted that the sharp reduction in new dwelling consents and eventual building work over the past two to three years had narrowed the gap between supply and demand, thereby taking the heat out of cost growth.

“Some builders now have spare capacity, which is helping cap further price rises. Construction activity appears to have stabilised, however any signs of a recovery remain tentative,” he said.

Construction costs are in a holding pattern

Looking ahead, Mr Davidson said easing interest rates and favourable lending conditions for new builds may support a modest lift in construction demand, but any return to the double-digit growth rates for costs experienced in 2022 was unlikely.

“If new-build activity picks up again, and there are signs it might, we could see construction costs start to rise a little more quickly over the next year or two,” he said.

“The key trend this year is construction costs are no longer spiralling but they’re also not falling. For now, we’re in a holding pattern, which will come as a welcome relief for builders, developers and households alike.”