Building and Construction Outlook quarterly report - December 2011
Prospects for recovery over the next year
In this issue we cover:
Overview
The Building and Construction Outlook report provides a regular summary of trends in the New Zealand construction industry, with information on a range of factors that affect those trends in future. It does not forecast building levels, but seeks to provide sufficient context for readers to reach their own conclusions about likely developments in the near future. Present trends show no short-term increase in building activity, but a prospect for recovery over the next year as a result of increased construction in Canterbury and economic growth. Recent uncertainty in economic conditions, particularly with regard to overseas developments, requires caution in any estimates of when and to what extent the building and construction sector will see increased activity.
This is expected to be the last quarterly Outlook report. The Department of Building and Housing will instead deliver sector trends and information via web-based Key Indicator Reports. These reports will be updated more quickly once key statistics are released, providing readers with more timely, relevant, and useful information. The Key Indicator Reports will be designed to present information in more user-friendly and understandable ways.
The new approach will also allow the Department to respond to emerging areas of concern and interest more quickly and flexibly, providing new indicators of interest within short timeframes to meet emerging information needs.
Four Key Indicator Reports are planned:
- Key Construction Indicators
- Key Housing Market Indicators
- Key Earthquake Recovery Indicators
- Key Social Housing Indicators
These new reports will cover the material currently included in the Building and Construction Outlook Report, as well as additional information. We will consult across the sector on the content and format of these reports through seminars and focus group discussions, working through key stakeholder groups. In addition, if you would like to share your views and priorities for Key Indicator Reports with us, please feel free to contact Anne Duncan, Manager Sector Trends and Performance, at anne.duncan@dbh.govt.nz.
Key Themes
Building consent levels remain lower than for 2010 but show a stable trend.
Both residential and non-residential building consent levels were lower in September 2011 than in September 2010. The trend in new dwelling consents has risen since March 2011. The trend in non-residential consent values appears to be flattening, but is highly volatile and lacks stable seasonal variations.
Increased economic growth is expected from the second half of 2012.
The Treasury is forecasting increased economic growth, rising through 2012 and 2013. The Treasury notes that its forecast is consistent with private sector forecasts, suggesting a degree of recovery for the construction sector.
Influences on construction sector show no short-term pressure for growth.
Permanent and long-term arrivals exceeded departures by only 800 in the year ending September 2011, marking the lowest net migration level in 10 years. Other influences on the industry, such as interest rates, house sales and house prices remain lower than in previous years and are fairly static. Construction costs have been relatively stable.
The Canterbury reconstruction is expected to take effect in 2012.
The Treasury’s forecast indicates that rebuilding in Canterbury is likely to begin in the second half of 2012.
The Auckland market continues to grow.
Construction is expected to increase over the next year in the Auckland area.
Residential consent levels show greater stability
The September 2011 quarter showed some growth in residential consents over the June quarter, while remaining lower than September 2010. Adjusting for seasonal effects, there were 3,281 new dwelling consents (excluding apartments) in the September 2011 quarter, up 9.7% on the June 2011 quarter after a 2.6% increase in the previous quarter. According to Statistics New Zealand, in its comment on the release of the September consent data, February 2011 was the turning point leading to an upward trend for the past seven months. With prospects of economic expansion, higher demand in Christchurch, and growth pressures in Auckland (all discussed later in this report), consent levels seem likely to increase.
Economic growth expected in medium term
Just as building consents declined in response to the recent recession, they may be expected to increase along with economic growth. The Treasury’s October 2011 Monthly Economic Indicators report forecast increased economic growth from 2012, although the November report warned of increased uncertainty due to international developments. The Treasury now forecasts annual growth of 3% in the year ending June 2013. The Treasury’s economic forecast is similar to those of other commentators.
Canterbury outlook
Treasury’s October 2011 Monthly Economic Indicators report notes that earthquake rebuilding in Canterbury is expected to begin in the second half of 2012. The New Zealand Construction Sentiment Survey for the third quarter of 2011, released by Davis Langdon, also anticipates an increase in construction for the Christchurch area. Although the survey identified some insurance and other issues as delaying the rebuild, 75% of Christchurch respondents expect an increase in construction activity.
New dwelling building consent numbers in Canterbury showed a 12% increase from September 2010 to September 2011, contrasting with a 1% decrease in consents for all of New Zealand over the same period. The number of new dwellings for Canterbury fell in September from the previous month, but the monthly numbers vary because the number of earthquake-related consents fluctuates from month to month.
Christchurch rents have changed little during 2011, although some central city suburbs have shown increases. Rents rose in September, but more time is needed to show whether the increase will continue. The trend in median house sale prices remains flat in Canterbury, as is the case for New Zealand as a whole.
Approximately 1,400 requests for temporary accommodation were received, of which 409 remained active as at 28 October 2011.
Auckland outlook
In Auckland, strong house sale numbers, often a driver of new builds, have not been enough to significantly boost new dwelling consents. There were 1,030 new dwelling consents issued in Auckland in the September 2011 quarter. This was 17.4% less than the average for the previous five July quarters, representing a lower decline than that for all over New Zealand, which was 24% over the same time periods.
Seventy-five percent of Auckland respondents to the New Zealand Construction Sentiment Survey anticipate that construction workloads will remain stable or increase over the next 12 months. The expected level of increase is less than in Christchurch but greater than in Wellington, where 50% of respondents anticipate a decline in construction work levels over the next year.
Low levels of net migration
Positive net migration has been a driver of residential building demand in the past. Migration levels have been low in the past year, largely because of higher levels of departures from New Zealand, particularly from Canterbury.
Statistics New Zealand’s migration report in September 2011 showed a low level of net migration for the previous year, with only 800 more permanent and long-term arrivals than departures. This represents the lowest level of net migration in 10 years.
As shown in the following table, there is a relationship between net migration (after a six-month lag) and new dwelling consents.
Interest rates likely to hold
The Reserve Bank maintained the official cash rate (OCR) at 2.5% in its September 2011 announcement. According to the Bank’s Monetary Policy Statement, economic growth is expected from factors such as high export commodity prices and the Canterbury reconstruction work. The Statement noted the risks of global economic problems due to factors such as sovereign debt problems in Europe. It forecast moderate increases in short-term interest rates, and inflation remaining within the Bank’s targets. The Bank noted that mortgage rates have remained stable, but that borrowers moving from fixed to floating mortgages may face lower interest rates as a result. As shown below, floating rates are currently about 6%.
House sales rising
House sale numbers rose 17.9% year-on-year for the September 2011 quarter. Much of the growth was from Auckland where house sale numbers rose 19.9% over the same period.
Despite higher volumes compared to a year ago, house sales remained low by historical standards. The total number of sales in the September 2011 quarter was 24.7% lower than the average sales in the 10 previous September quarters.
The Reserve Bank in its September 2011 Monetary Policy Statement observed that, to date, the pick-up in housing demand has not outstripped supply.
House prices remaining stable
The Reserve Bank’s September Monetary Policy Statement forecast only modest increases in house prices over coming years, in line with expected inflation. Massey University’s house affordability index, reported in September 2011, showed that housing affordability increased by 8.4% over the previous year. It showed, however, that affordability increased more slowly in the most recent quarter.
Stable construction costs
Changes in producer prices and labour costs remained small through September 2011.
The construction inputs measure of the Producers Price Index, which covers most of the non-labour costs of construction, rose 3.2% in the year ended September 2011. Relatively high commodity prices were offset by a strong New Zealand dollar.
Labour costs rose modestly in the September quarter. According to the Labour Cost Index, the cost of salary and wages in construction rose 2.2% in the year ended September 2011.
Building and Construction Sector Productivity Partnership’s Research Action Plan
The Building and Construction Sector Productivity Partnership’s Evidence Workstream has released its draft Research Action Plan for industry consultation.
The Productivity Partnership is a partnership between industry and government established in November 2010 to address the issue of low productivity in the sector. Its challenge is to build the value of the sector by transforming the way it works from end to end, and raise its productivity by 20% by 2020.
The Evidence Workstream developed the Research Action Plan to identify the most important knowledge gaps and the key research questions that need to be developed into research projects. The Plan provides a starting point for identifying knowledge needed in future to achieve the Partnership’s vision. The Plan focuses on the big issues – leaky buildings, Canterbury rebuild, Wellington and Auckland.
We would like your input into the plan. You are invited to respond to the draft Research Action Plan. You can do so by visiting the Partnership’s website www.buildingvalue.co.nz and clicking on the “Have your say” button. The draft plan is also available on the site.
Otherwise, please contact the Partnership on evidence@buildingvalue.co.nz.