Construction Costs See Biggest Jump Since GFC

The cost of both residential and non-residential construction rose more than 10% last year and similar forecasts are expected for 2022 according to the NZ Infrastructure Commission’s Quarterly report.

“Infrastructure providers, property developers, and households are trying to build more than ever, but labour shortages, material supply chain bottlenecks, and Covid-induced slowdowns have gotten in the way,” says Commission Director of Economics, Peter Nunns.

“While COVID-19 revealed our problems – it is not the only cause. Even before the Covid pandemic, New Zealand struggled to scale up to build and had a heavy reliance on international workforce. This reflects long-term issues around workforce capacity and capability, material supply chains, and volatility of investment.”

“These ‘preexisting conditions’ have made our construction market unusually vulnerable to Covid – highlighting the importance of solving those issues to build resilience and meet our long-term infrastructure challenges.”

Government policy on immigration has materially changed since COVID-19 came along. The relief-valve to periods of rapid demand growth was previously resourced by international labour – a factor that contributed to residential construction workers in Auckland doubling between 2011 and 2019.

However, despite having various immigration pathways for ‘critical workers,’ industry feedback suggests that Immigration and MIQ constraints have effectively closed the door on the international workforce leaving us critically short of skilled construction workers. This has led to an extremely tight construction labour market fuelling cost pressure.

New Zealand’s construction cost inflation is among the highest in the OCED.

“New Zealand had the 10th highest construction price inflation in the OECD during this time, but again, this isn’t just a Covid-era phenomenon. Over the last five years, New Zealand had the seventh-highest construction price inflation in the OECD. Our residential construction price inflation averaged 5.2% per annum from 2016 to 2021.”

The Commission is considering these issues as it develops a New Zealand Infrastructure Strategy. In its draft strategy it included recommendations that will help address cost inflation, such as ensuring a stronger focus is placed on good decision making and planning for the construction workforce.

“We can only build high-quality infrastructure at an affordable cost if we make good decisions about how to plan, invest in, deliver and manage our infrastructure. Likewise, we need the right people, at the right time with the right skills to build our construction sector,” Peter Nunns says.

The Infrastructure Quarterly Report is available on the Commission’s website.

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