Construction costs rise expected in wake of floods

The scale of Auckland’s flooding damage could be in the range of $500 million plus and increase construction costs as well as inflation.

Wednesday, February 8th 2023, 2:25PM

by Sally Lindsay

This makes it New Zealand’s most expensive weather-related event. However, it’s well short of the cost of repairs that followed the 2010-11 Canterbury earthquakes, which came in at about $40 billion (spread over many years). Repairs following the 2016 Kaikoura earthquake cost around $2 billion.

To put these numbers in perspective, nationwide building activity (including infrastructure) is running at more than $50 billion a year. The industry is already stretched to capacity, especially in the residential building sector.

This is a major contrast with the Canterbury earthquake rebuild, when the industry was starting from a depressed state in the wake of the GFC recession.

As a result, Westpac economists suspect flood recovery work won’t end up being much of a boost to building activity – rather, some projects will be delayed or shelved while the repair work takes priority.

The additional pressure is instead likely to be channelled into prices and inflation, the economists say. There were signs that construction cost inflation was starting to slow at the end of 2022, but it may now take longer to recede.

Kiwibank chief economist Jarrod Kerr says adding pressure on a capacity-constrained sector means the rebuild will be inflationary. “Construction costs have eased back as supply chains slowly normalise. But exacerbating the lingering shortages could see construction costs accelerate. And as a key driver of domestic inflation, the rebuild frustrates the outlook,” he says.

Kerr says although the Auckland floods will have significant economic consequences, he does not expect it to change the trajectory of monetary policy.

Delayed downturn

The additional work created by the flood recovery doesn’t detract from the broader issues that the homebuilding industry faces, Westpac says.

“The level of activity remains high for now, but the financial incentives for housing development have turned a lot less attractive. Interest rates have risen sharply, building costs are rising rapidly, and existing house prices have fallen. This is leading to hesitancy among both developers and buyers.” As a result, Westpac’s economists expect to see building consents easing back from their elevated levels over the next few years.

That doesn’t mean that a crash in construction activity is imminent.

Over the past year, the number of new consented projects has risen much faster than actual construction activity. As a result, there still is a substantial existing pipeline of planned work. The construction sector is continuing to grapple with stretched capacity and shortages of skilled staff. Those conditions are acting as a handbrake on the pace of building activity.

Even a gradual downturn will prove challenging for some operators. The economists say the homebuilding industry is dominated by small players, often weakly capitalised and with little oversight of their finances.

“Even in the best of times, construction firms account for an outsized proportion of business failures. Those that can tightly control their costs and diversify their sources of income will be best placed to ride out the downleg of the cycle.”

Tags: construction