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Building Up and Breaking Down: Navigating the Rollercoaster of New Zealand's Construction Industry

Updated: Dec 2, 2023

The New Zealand building and construction industry plays a significant role in New Zealand's economy and is subject to various trends, including building consents. Consents are a crucial part of the industry as they ensure compliance with regulations and standards while reflecting the demand for new construction projects. Trends in building consents have a considerable impact on the industry, shaping its growth, investment patterns, and overall performance. One key trend is the fluctuation in the number of consents issued. Higher numbers of building consents indicate increased demand for construction, which can lead to economic growth and job creation. Conversely, a decrease in consents may suggest a slowdown in the industry, potentially affecting employment and investment opportunities.

If you refer to the graph below from Stats NZ, you will see the highs and lows of the NZ construction industry over the last 50+ years. I joined the construction industry with window and door supply in 1996 but was not aware of the trends in the construction sector until I became a manager. It was then that I realized how the ebb and flow of the industry affected the business and team members. From the highs of 2005 where there was so much work on that there just wasn’t time to think about how many hours we were working. To the extreme lows of the global financial crisis in 2009 where redundancies were initiated. However, since around 2012 the industry has been on a high, and the type of buildings being built has been changing.

A significant trend is the type and scale of construction projects approved through building consents. For instance, there has been a growing focus on sustainable and energy-efficient buildings driven by environmental concerns and government regulations. This trend has led to increased consents for projects incorporating multi-unit dwellings and green building practices, such as renewable energy systems, efficient insulation, and water-saving measures. Additionally, demographic changes and urbanisation have influenced building consent trends in New Zealand. The demand for housing, particularly in urban areas, has led to a rise in consents for residential developments, including apartment buildings and townhouses. Similarly, commercial and infrastructure projects, such as office buildings, retail spaces, and transportation networks, have increased consents to support growing urban populations. However, a new trend is the recent decline in both stand-alone houses and the 10-year high of multi-unit homes, which are both trending down (refer to Stats NZ chart above).

While consents overall are still at an all-time high, it is the downward trend in multi-unit homes and the significant spike down of stand-alone homes that are concerning.

What happens to the construction industry in Election years?

We must remember that 2023 was an election year and elections can affect the construction industry. It's important to note that the influence of an election on the construction industry can be complex and multifaceted. Local factors, regional dynamics, and global economic trends also play significant roles. However, while the specific impacts can vary depending on the region, there are some general trends and considerations to keep in mind:

1. Investment and Infrastructure Spending: Election years often see increased political focus on infrastructure development and public projects. Candidates may propose ambitious plans to boost economic growth, improve transportation networks, or address housing needs. Consequently, there might be an increase in government spending on construction projects, which can create opportunities in large-scale public projects.

2. Policy Uncertainty: Elections bring uncertainty as different political parties and candidates present their policy platforms. Proposed policy changes, such as alterations to zoning regulations, building codes, or incentives for sustainable construction, may impact planning and decision-making in the construction industry. This uncertainty can temporarily slow construction activity as developers and investors may adopt a wait-and-see approach.

3. Regulatory Changes: Following an election, regulatory changes may occur as new administrations take office or existing ones adjust their priorities. These changes can influence construction practices, permits, and compliance requirements. This will undoubtedly affect the NZ construction industry, as the previous government favoured green initiatives in the construction industry. However, it is uncertain what the new coalition government will bring to the construction industry at this stage.

4. Public Infrastructure Priorities: Election campaigns often highlight a region's specific infrastructure needs or challenges. Candidates might focus on transportation, affordable housing, or renewable energy issues. Consequently, the construction industry may experience shifts in demand as projects related to these priorities are emphasised or deprioritised based on election outcomes.

5. Economic Factors: Elections can impact the overall economy, affecting the construction industry. Changes in government spending, tax policies, or trade regulations can have ripple effects on business confidence, interest rates, and investment decisions.

Technology and innovation also play a role in shaping building consent trends. The industry has witnessed digital platforms and software advancements to streamline the consent application and approval processes. These tools enable faster and more efficient communication between stakeholders, reducing delays and improving productivity. But, there are still humans interacting with that technology, which could initially lead to a slowdown in the consenting process Furthermore, changing regulations and policies have implications for building consents and the construction industry. Government initiatives, such as incentives for affordable housing, earthquake strengthening, and seismic resilience, influence the types of projects that request consents and the overall direction of the industry.

But some good news is that New Zealand has finally experienced positive net migration.

New Zealand is experiencing positive net migration

Since the global pandemic, New Zealand has suffered from negative net migration. This means we have had an ageing population and workforce, a reduced customer base, reduced skills and a talent drain, which all have an adverse effect on the housing market. However, for the first time in 3 years, New Zealand is currently experiencing positive net migration, which means more people are moving to the country than leaving it. This influx of migrants significantly affects various aspects of New Zealand society and the economy.

1. Economic Growth: Positive net migration contributes to economic growth by increasing the population and labour force. Migrants bring diverse skills, expertise, and entrepreneurial spirit, which can lead to innovation and productivity gains. They contribute to various sectors of the economy, including construction, healthcare, IT, and education, among others. The increased economic activity from migrants can stimulate business growth and job creation.

2. Skills and Workforce Development: New Zealand's positive net migration helps address skill shortages, which we know has affected the construction industry and many industries. It's great news if the country is once again attracting skilled workers, professionals, and students who contribute to critical sectors that require specialised knowledge. This would help fill labour market gaps and support economic development. Additionally, migrants often bring international perspectives, cultural diversity, and different work experiences, enriching New Zealand's workforce and fostering knowledge-sharing.

3. Housing Market and Infrastructure: The increased population from positive net migration can put pressure on the housing market and infrastructure. Stronger demand for housing can drive up prices, particularly in regions with high migrant concentrations. Auckland's median sale price of a property is $1,040,000, which is down -3.6% and the average countrywide house price is $795,000, which is down -2.8% (REINZ). This reinforces the need for sufficient housing supply and infrastructure development to accommodate the growing population and the cost of housing in New Zealand.

4. Cultural Diversity and Social Integration: Positive net migration enhances cultural diversity and social integration in New Zealand. Migrants bring their traditions, languages, and perspectives, enriching the country's cultural fabric. This multicultural environment fosters tolerance, understanding, and cultural exchange. However, it also poses challenges related to social cohesion, inclusion, and providing support and services for different cultural communities. It is crucial to promote social integration and fostering a sense of belonging for migrants and host communities.

5. Demographic Impact: Positive net migration can influence the demographic makeup of New Zealand. It can contribute to population growth and potentially affect age distribution, ethnic diversity, and regional dynamics. This has implications for healthcare services, education, and social welfare systems, which need to adapt to changing needs and demographics.

How easy was it to borrow money in 2023?

Official cash rates are set by the Reserve Bank in New Zealand to influence the overall cost of borrowing and lending in an economy. These rates play a crucial role in determining the interest rates offered by banks and other financial institutions. When the Reserve Bank increases the official cash rate, it becomes more expensive for banks to borrow money. The New Zealand Official Cash Rate (“OCR”), hit an all time low of 0.23% in December 2020, making it extremely easy to borrow money for those big ticket purchases. Unfortunately, the OCR has been steadily climbing since 2020.

The rising OCR has led banks to raise the interest rates they charge on loans to maintain their profit margins. This increase in lending rates affects various types of loans, such as mortgages, personal loans, and business loans. For the construction industry, that makes it more difficult for developers to access project funds.

Higher interest rates can have several implications for individuals and businesses. For example, if mortgage interest rates rise, it becomes more expensive for individuals to borrow money to buy a home, potentially leading to a decrease in demand for housing. Similarly, higher loan interest rates can discourage businesses from borrowing to invest in expansion or new projects, which can impact economic growth.

Conversely, when the Reserve Bank reduces the official cash rate, it becomes cheaper for banks to borrow money. This encourages banks to lower the interest rates they offer on loans to attract borrowers. Lower interest rates stimulate borrowing and spending, as individuals and businesses find it more affordable to take on debt. New Zealand has felt the positive influence of a low OCR since the 2016.

When interest rates decrease, it often leads to an increase in consumer spending, as people can borrow money at lower costs. Lower interest rates can also incentivise businesses to invest in new projects or expand their operations, boosting economic activity. It is important to note that while official cash rates influence interest rates, they are not the sole determinant. Other factors, such as the economy's health, inflation expectations, and market forces, also play a role in shaping interest rates.

The construction industry has been relatively safe from fluctuations since the 2008 Global Financial Crisis. But overall, the relationship between official cash rates, interest rates and issued consents is significant. Changes in official cash rates directly impact the cost of borrowing and lending in an economy, affecting individuals, businesses, and overall economic activity. Fluctuations in the number of consents, shifts in project types, and technological advancements also shape the construction industry's growth, investment patterns, and adherence to regulations. 2024 may be bumpy, but it’s currently holding its own.

I believe that construction industry downturns tend to be self-fulfilling prophecies. If money and land continue to be available, then the importance of housing our population in safe, well-built homes should continue to be a priority.

Do you have an opinion you would like to share about the outlook for the construction industry in 2024?

Main photo by Unsplash, royalty free

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