New Zealand construction sector boom still has years left

The New Zealand building boom is set to continue, according to leading industry analyst and economic forecaster, BIS Shrapnel.

The New Zealand building boom is set to continue, according to leading industry analyst and economic forecaster, BIS Shrapnel.

The New Zealand building boom is set to continue, according to leading industry analyst and economic forecaster, BIS Shrapnel. Boosted by surging net migration, accommodative monetary policy and robust economic growth, residential construction is set to rise further over the medium term, even as growth in the non-residential sector tempers.

According to the latest Building and Construction in New Zealand 2017-2022 report, the total value of building authorised (including residential and non-residential) is expected to peak in the financial year ending March 2017 and will remain above $10 billion in the next two years before activity levels off.

The slight decline in 2017/18 is expected to be the first year of negative growth in the overall sector for five years, while dwelling construction is forecast to continue growing until 2019/20, representing seven years of consecutive growth. Following a period of cyclical adjustment, construction activity is forecast to once again rise above $10 billion at the end of the outlook period in 2021/22, back near the record high reached this year.

The dynamics of population growth is a major driver of construction activity and a key determinant of medium and long term trends. Reflecting this, exceptionally high net migration in recent years has been a major contributor to strong growth in dwelling building activity. Net migration continued to surge in 2016 and the latest indication is that these high flows are likely to continue, with the 2017 year ending June set to be another record year of inflow according to estimates.

The construction sector will also be supported by the promising outlook for the economy over the medium term. A healthy labour market and persistent accommodative monetary policy settings are expected to provide a boost to domestic consumption and business investment while the strong tourism sector will continue to lend support. Building activity in the coming year and beyond is likely to still be led by Auckland.

Several factors that will contribute to the Auckland dwelling sector include strong population growth through migration inflows, housing stock deficiency and the implementation of the Auckland Unitary Plan. Furthermore, still tight supply in the office, retail and industrial sectors in particular will see non-residential building activity in the Auckland region running at fairly high levels over the forecast period.

Building activity in other regions is also improving, backed by positive underlying economic fundamentals that have underpinned investment growth. It is worth noting that these fundamentals have been facilitated by the strong economic performance of the Auckland region, with the fastest growing smaller regions – Hamilton, Waikato and Tauranga – mostly located within close proximity.

Leasing activities for commercial and industrial property are expected to remain strong amid tight supply in the coming years. Positive business and consumer sentiment on the back of continued strength in the domestic economy will drive demand for office, retail and industrial buildings in the coming years. However, new supply coming online in the near term is likely to result in slower growth in commercial property rentals, and higher vacancy rates that would bring the market back to an equilibrium. Forecasted strong population growth is expected to generate greater demand for social and institutional, as well as retail and office buildings over the longer term.

The total value of non-residential building authorised is forecast to move into a downturn over the outlook period, mainly because the majority of developments in the Canterbury rebuilding effort are now underway. As is the case in the dwelling sector though, fervent building in Auckland will provide a floor to building activity.

It’s expect that civil engineering construction will expand moderately over most of the forecast period. Road related infrastructure spending will benefit from government initiatives including funding for the National Land Transport Programme, while rail and communications related expenditure will be more modest.