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Construction costs for residential and commercial builds is forcing sale and rental prices to new heights. Research from Colliers International shows the inflation on costs of building is an example of how much pressure there is on prices to keep rising. Since the mid-1980s, construction costs have increased phenomenally, the report says. And despite cost pressures in the residential sector being below the commercial sector pre-2000, this changed in early 2003. Between 2008 and 2011 residential cost pressures for new build properties stabilised after the global financial crisis (GFC), but were soon to go exponential along with house price rises. Meanwhile, commercial property construction prices faced a different growth path. The costs to construct shops, office and industrial premises dipped after the GFC at a rate that had not been experienced since 1980. It was only a shallow decline which flattened out until 2013, before the sector took off again. Some of this construction cost growth relates to pressure from the Christchurch earthquake rebuild. [This] highlights just how little capacity we have in New Zealand to rectify major imbalances between demand and supply, especially in a low overall inflation rate environment, the report says. The two key periods of growth in the residential sector that were out of character with the commercial sector were in 1994, and 2008 to 2009. In 1994, construction cost growth rate per year for commercial property were about half of the residential sector. This coincides with a 45 per cent rise in house prices in Auckland between mid-1992 and late 1995, according to the Reserve Bank. The other pivotal time was post-GFC. Residential construction cost changes flat lined, but didn''t reach negative territory like its commercial counterpart, it said. Similarly, house prices also remained relatively flat. The current annual growth rates in construction costs in the residential sector reached 6 per cent in the year to June 2016. Current trends indicate that this rate of construction cost growth may have slowed, potentially correlating with a recent slow down in house price appreciation in Auckland since the latest measures of LVR restrictions implemented by the Reserve Bank, the report said. The commercial sector has already experienced a slight slow down in construction cost price rises. The outlook for the non-residential sector for construction costs does see a slight dip in costs over the short-term. As noted in the latest Rider Levett Bucknall Forecast Report, this level of construction cost growth will be the highest-sustained inflation in the sector since the construction boom of the mid-2000s. However, it is not expected that inflation will be as high as in the mid-2000s. Though, costs rising by this rate year-on-year will ultimately lead to unavoidable cost rises in rents and prices for both residential and commercial property. |
