Liam Dann: Housing warning for new Government in inflation stats

Inflation data out today shows the cost of construction in Auckland rising at a rate 6.8 per cent year - an ominous sign for the new Government regardless of its political colours.

Both major parties have promised historic programmes of residential construction to relieve Auckland's housing shortage and affordability issues.

But today's data suggests the industry is already bumping up against capacity issues, making any acceleration in building very difficult - or costly - to achieve.

Consumer Price Index data for the third quarter showed inflation rising by 0.5 per cent (quarter on quarter), above what the market and the RBNZ had forecast. On an annual basis, it rose 1.9 per cent up from 1.7 per cent in the second quarter.

That's nearly in line with the Reserve Bank's target of 2 per cent and is broadly considered positive economic news because of the long period that inflation has been tracking below target.

However, as ASB chief economist Nick Tuffley notes, higher "housing and food costs continue to drive the vast majority of inflation in New Zealand".

Nationally housing and utilities costs - which exclude residential sales prices - rose by 1 per cent over the quarter

That rise included 3.1 per cent rise in rates, a 0.6 per cent lift in rents and a 1.1 per cent increase in construction costs.

ASB noted both rent and construction cost increases were highest in Wellington. However, on an annual basis, construction costs continue to be most acute in Auckland at 6.8 per cent year on year.

"Recently, the construction sector has become increasingly capacity constrained and it is no surprise to see prices continuing to respond to high levels of demand," Tuffley wrote in his commentary.

Rising costs in a market where house prices are now flat or falling will put pressure on those looking develop properties.

The latest REINZ House Price Index showed Auckland prices down 0.7 per cent in the year to September.

It is a dynamic that adds risk around delays and timing as rising costs and stagnant prices alter the financial equations for developers and have the potential to create funding issues if they have not been adequately factored in.

It may also deter private sector developers at a time when expectations for new house building are extremely high.

Outside of the housing category food prices also continued to rise - 1.1 per cent over the quarter - driven largely by higher prices for vegetables.

"Tomatoes in particular experienced a whopping 34 per cent quarter on quarter cost increase," Kiwibank economists noted. "A series of bad weather events has hit the supply of fresh produce in NZ and has meant that food prices are now 3 per cent higher on average than they were a year ago, with fruit and vegetable prices in particular up 6.4 per cent year on year."

On the downside the big falls were in the transport category, down 1.1 per cent annually, with international airfares, petrol prices and vehicle re-licensing fees all falling.

The other fall was in the communications sector where prices continue to decline, down 1.3 per cent annually.

Despite running ahead of RBNZ forecasts, economists saw little in the numbers to change the bank's projected track for interest rates - which has no hikes factored in until 2019.