Building consents sink

A truly spectacular crash to fresh lows is being predicted for the construction industry by ANZ as building consents sank 2.3% in June compared to just 0.5% in May.

Wednesday, August 3rd 2022, 10:45AM

by Sally Lindsay

ANZ chief economist Sharon Zollner says the outlook for house-building has hit a brick wall and data suggests building consents may have a lot further to fall yet.

June’s drop in consents was the third monthly decline in a row on a seasonally adjusted basis. The June figures were just over 11.5% lower than March.

The last time building consents fell three months in a row was beween November 2016 and January 2017.

Over the past year, 50,500 new dwellings have been consented.

This points to a large pipeline of work over the next year to 18 months. However, Fletcher Building says at that level, consents are running 20-30% ahead of the industry’s capacity to build. The ideal capacity for building is 35,000 houses a year.

Westpac senior economist Satish Ranchhod says with shortages of materials and labour resulting in widespread delays, planned work is taking longer to complete. Combined, those conditions don’t point to a sharp fall in building activity in the near term.

The biggest materials shortage is plasterboard, but 100 containers of the product are on their way after the dominant supplier Fletcher Building, with a 96% market share, could not supply enough.

Twelve importers have arranged the plasterboard shipments with a range of products able to be used instead of Fletcher Building’s Gib.

Conditions in the construction sector have changed, says Ranchhod and a peak in the construction cycle is fast approaching, if it’s not already here.

“The big change has been in the financial incentives for developers. House prices are falling, and prospective buyers are increasingly hesitant about purchasing homes off the plans,” he says.

At the same time, build costs have skyrocketed. Property research firm Core Logic's latest Cordell Construction Cost Index (CCCI has risen 7.7% - the swiftest rise in a decade. The pressure is not expected to come off for at least another couple of quarters.

Alongside building rising building costs is staff shortages. Ranchhod says the resulting squeeze on profit margins has meant developers are growing increasingly nervous about bringing new projects to market. That pressure has been compounded by the rise in borrowing costs.

At the same time, there has been a big change in population trends compared to pre-pandemic levels. Through much of the past decade, population growth far outpaced home building, and shortages of housing developed in many regions (especially Auckland).

Now, net migration has plummeted and is set to remain low for some time, says Ranchhod. “With a downturn in population growth at the same time that home building has charged higher, the shortages that developed in recent years are now being rapidly eroded. Even allowing for a gradual lift in migration over the coming years, consents are now running well ahead of what’s needed to keep up with population changes.

“To date, there has been only a moderate cooling in the number of new projects being consented. However, there can be long lags from the time a project is initiated and when a consent is issued.”

Ranchhod says with financial conditions becoming increasingly tight, he expects to see consents continuing to go down over the coming months. “That signals a pullback from the elevated levels of building activity over the coming year. However, with a significant pipeline of projects already in train, this is likely to be an easing back, rather than a collapse.”

The construction industry is in a precarious position. More than 18% of company failures in the past year were building companies going under mainly because of labour and material shortages and increasing costs.

Since the start of this year, 92 construction companies have been put in liquidation.

Tags: building