The residential construction industry has entered the bust phase of its boom-and-bust cycle. Rapidly rising mortgage rates, inflation, and a weakening employment market have led to a sharp decline in new home construction.
Annual residential consents are at 43,490 for the year to July 2023, which is just over 14 percent less compared to July 2022. All indications are that mortgage rates will stay high for some time, meaning that it is likely that residential consent numbers will continue to decline in the near future. However, rising net migration, which increases demand for houses, could mitigate how far consents fall.
The Global Financial Crisis (GFC) was the last time New Zealand’s residential construction industry was in decline. At that time, annual residential consents dropped to 14,000 from 25,000 per year, a decline of around 45 percent. Annual residential consent numbers had already decreased from a peak of 33,000 in 2004. It took three years after the initial decline in late 2008 before annual residential consents numbers would start to grow again. The next boom cycle was ushered in from 2012 through to 2022, on the back of low interest rates and strong net migration.
Residential building consents over that time grew from around 14,000 per year to a historic peak of 51,000 for year to May 2022.
Despite the prospect of a sharp decline, there is one silver lining: the growth of construction prices has also slowed down. The Cordell Construction Cost Index, compiled by Core Logic, dropped to 6.4 percent for the year to June 2023, down from 10.4 percent for the year to December 2022.
As the residential construction industry enters a slump, there are three questions to answer: how long will the decline last, how low will residential consent numbers go, and is there scope for intervention from central government to mitigate the decline?
How long will the decline last?
It took three years for the industry to start recovering after the GFC, on the back of low interest rates and strong net migration. While New Zealand currently has strong net migration – reaching 86,800 for the year to June 2023 – the country definitely does not have the same low interest rates, and it will take some time for these to start falling again. We estimate that it will take two to three years for the annual number of residential consents to start recovering from the current decline.
How low will residential consent numbers go?
In total, the number of annual residential consents declined by approximately 45 percent during the economic downturn caused by the GFC. If we apply this figure to the peak prior to the current decline, then annual residential consents could drop to around 28,000 consents. A 45 percent decline in annual residential consents may not seem like a big deal, considering that the current 10-year average is 34,300 per year. However, this decline could have a significant impact on New Zealand's construction industry, as it could lead to the loss of experienced building workers. This would limit our capacity to build houses once the industry starts to recover.
Is there scope for intervention from central government to mitigate the decline?
It will be interesting to see what will happen after the election. The Government will have to address the housing shortage at some level. It will also have to address New Zealand’s skills shortages to ensure that we can hold onto our skilled workforce as the industry recovers over the next two to three years.