The latest Cordell Construction Cost Index (CCCI) shows residential construction costs rose 1.1% in the three months to June, up from 1.0% in the March quarter and broadly in line with the long-term quarterly average.
Annual cost growth accelerated to 3.5%, from 3.0% in the previous quarter, marking the strongest annual increase since mid-2023.
Cotality NZ Chief Property Economist Kelvin Davidson said although the annual figure was still below the long-term average of around 4%, the figures suggest the period of unusually subdued construction cost growth has begun to fade.
“Construction costs aren’t surging again, but conditions are becoming less favourable for builders and households, who may have been hoping build costs would soften further,” he said.
“As construction activity starts to recover, quarterly growth remains close to its long-run average, but the annual rate has accelerated for three consecutive quarters. That suggests the exceptionally quiet period for construction cost inflation is probably behind us.”
He said the construction sector was emerging from a prolonged downturn, with more projects beginning to move ahead after a significant lift in dwelling consents over recent months.
“The annual number of dwelling consents has risen from below 34,000 last year to more than 39,000 and even though not every consent becomes a completed home, it’s a sign that activity is beginning to return.”
Recovery brings fresh cost pressures
Alongside stronger domestic activity, global events also flowed through to impact construction costs.
Oil price increases following the conflict in the Middle East have led to higher transport costs, while suppliers are reporting price hikes on several building materials.
Cordell’s latest analysis identified increases across structural steel, plumbing components, insulation and aluminium roofing accessories, with several suppliers indicating further increases may follow if global uncertainty persists.
“Builders are still operating in a competitive market where existing house prices have been flat or only rising modestly, so there’s limited ability to pass higher costs directly on to customers,” he said.
“That means many firms are absorbing some of those increases through tighter margins rather than significantly increasing contract prices.”
“Clearly, a lasting US-Iran peace deal would be another welcome boost for the sector, as well as taking some heat out of cost pressures. But unfortunately this hope has gone backwards in recent days.”
Better home building conditions ahead
Despite higher construction costs, Mr Davidson said the growing prospect of improving economic conditions should support a gradual recovery in residential building over the second half of the year, notwithstanding US-Iran uncertainty.
Lower mortgage rates, easing inflation pressures and stronger confidence – if they become reality – were expected to improve project feasibility for both developers and owner-builders.
“If inflation can moderate a bit and interest rates remain supportive, more households will have the confidence to commit to building,” he said.
“Construction costs aren’t cheap by any means, but the industry isn’t seeing the rapid increases we experienced through 2021 and 2022. Conditions are closer to long-term averages, where modest cost increases reflect healthier levels of activity rather than the supply shocks we saw during the pandemic.”
However, Mr Davidson said construction costs were likely to come under further upward pressure as the pipeline of approved projects continued to grow.
“A busier construction sector is ultimately positive for housing supply, even if it brings some modest upward pressure on build costs.”
The CCCI is comprised of around 50% materials, 40% wages, and 10% for other charges such as professional fees.