New Zealand is lurching towards a historic construction sector slump not seen since the Global Financial Crisis. Instead of supporting the sector, the coalition Government has hastened its decline by putting a stop to its own building projects in public housing and infrastructure. The winners will be institutional property investors enjoying sustained rent and price increases. Those who lose out will be first-home buyers and renters, as well as the one in 10 Kiwis who work in the infrastructure sector.
One of the biggest revelations on Budget Day was Treasury’s forecast for a major slowdown in building sector activity. Treasury said rents would rise rapidly over the coming years due to high population growth and a construction sector slump. It also forecast unemployment to rise to 5.3% by the end of this year.
That picture aligns with what construction sector leaders have been trying to tell the Government. In April, industry leaders wrote to Housing Minister Chris Bishop warning about the negative impact of slowing down water, transport, and housing projects.
Residential building activity is expected to decline in the coming year, with a net 65% of building sector firms expecting worse times ahead. Consents for new dwellings in the March 2024 quarter were down more than a third from two years ago. Kāinga Ora builds due to be built after June 2025 now face funding uncertainty as National and its allies chose to cut $1.5 billion from building and maintaining public housing in the Budget. Thousands of much-needed new builds are on the chopping block.
The best way to address a housing shortage is to supply more quality housing at pace, making this the worst time for public housing builds to be cut. Kāinga Ora has plans to build more than 100 houses in central Manukau for seniors and people who desperately need affordable rentals. However, with Bishop’s announcement on Newstalk ZB this month that the Government is “not giving Kāinga Ora any new funding for extra places beyond 30th of June 2025″, shovels will not be in the ground any time soon.
Infrastructure projects funded by the previous Labour Government, particularly school and hospital builds, are helping to keep the industry buoyant and disguising the true impact of the coalition’s Budget decisions. Projects such as the Manukau SuperClinic rebuild, funded in 2021 to deliver a much wider range of services, will ramp up to 500 workers on-site by the end of the year.
But for every project now in its completion stage, there are more public sector projects being delayed, deferred and abandoned.
Inflation pressure also continues to strain the construction industry. The cost of new housing has been a major contributor to the elevated inflation. Although price increases have slowed in line with overall inflation, we have not seen prices even begin to return to previous levels.
Housing Minister Chris Bishop (left) and Prime Minister Christopher Luxon. Photo / Mark Mitchell
This puts the Reserve Bank between a rock and a hard place. Despite its rhetoric, National’s tax cuts will add further stimulus to the economy in the early years of the forecast period, when inflation is still a concern. Tightening monetary policy will further impede construction sector growth, as the sector is one of the first to bear the impact of higher interest rates.
The Reserve Bank’s role is to focus on the overall level of inflation, rather than sector by sector. However, the more adjustment to inflation there is through reduced investment in infrastructure, the more we are constraining the ability of the supply side of the economy to meet New Zealand’s needs.
In previous years, when the construction sector was facing similar conditions, the Labour Government took a very different approach. In early 2020 the New Zealand Upgrade Programme was announced and included $12b worth of infrastructure projects. In the early stages of Covid-19, the Apprenticeship Boost scheme provided certainty to employers to take on and train additional workers and expand the construction workforce. Through these policies, we were able to support employment, support families’ income through the cost-of-living crisis and continue to build for the future.
Despite the coalition’s plan to relax zoning rules, the failure to follow through on infrastructure investment to support housing development risks undermining any positive impacts on supply.
There’s also no clear plan to support first-home buyers. What National often overlooked in its dogged opposition to the removal of interest deductibility tax breaks for landlords was that interest deductions continued to be available for new builds. Maintaining this approach, alongside working to free up additional land for development, would have been a sensible way to ensure property investment was being directed toward additional supply. Instead, the Government is again opening the door to investors to buy up the existing stock of housing at the expense of first homebuyers.
The Government’s approach to housing puts a lot of weight on the role of deregulation. But for the sake of those looking to buy their first home or find a healthy rental, Bishop needs to recognise the Government’s role is also about fronting up with investment to ensure all New Zealanders have a warm, secure place to call home and public infrastructure they can rely on.
