The residential construction sector is under pressure. Photo / 123RF
A major building company estimates its pipeline of residential work could drop by up to 50 per cent this year compared to 2022.
An industry leader fears skilled tradies could lose their jobs if margins aren’t retained, while some developments have been put on hold or rescoped to make them more affordable.
Builders told NZME that high-interest rates and inflation had a huge impact on the industry and were another “nail in the coffin of housing affordability”.
Master Builders Association chief executive David Kelly said the sector has been here before.
“We are resilient, but we also need to be careful not to talk ourselves into a bigger recession.”
Classic Group director Peter Cooney said the slowdown was about to be felt, with sales well down.
“I suspect they will stay this way until we see interest start to trend downwards.”
“Interest rates have had a huge impact, with uncertainty and the cost of servicing mortgages making it very hard for people to commit. Inflation has caused house prices to increase substantially.”
Cooney said he estimated its pipeline of work could fall 40 to 50 per cent this year compared to last year.
Questioned if that may prompt any job losses, he said: “With any downturn in the construction sector, you will always see job losses.”
“I would like to think that the Government [will continue] to put infrastructure in the ground while the slowdown is here, as we all know that the market will at some stage bounce back - maybe not to levels seen [previously], but it will come back.’'
Cooney said the Government’s housing development should help the industry “if they can start to get the volume under way, which to date seems to be an issue”.
Venture Developments director Mark Fraser-Jones agreed the effect of inflation on the price of construction has been another “nail in the coffin of housing affordability”.
Coupled with the huge increase in the cost of developing land due to, in his view, increasing bureaucratic overzealousness at central and local levels, the end price of a house had risen dramatically over the past few years.
“Rising interest rates to combat inflation are a necessary evil, and despite the rising of them being swift and fairly severe to anyone with a mortgage, they are only at around 6 to 7 per cent, which up until recent times was a fairly normal rate. Generally speaking, I would expect demand for new housing to stay slightly muted until interest rates stabilise and inflationary pressure eases, which will reduce the amount of cost increases the industry has to pass on.
“It looks as though that may be happening now, so that should bring some confidence back to the market.”
The biggest challenge for Venture Developments as a company was working on new ways to keep the price of a new build affordable, he said.
“This means constant innovation in the type of housing we can offer to the market. Expect to see more terrace townhouse developments, as land scarcity continues to be a big issue in this region.”
New Zealand Certified Builders Association chief executive Malcolm Fleming said inquiries for new builds or alterations and additions in the small to medium residential market had dropped about 20 per cent from a year ago.
Forward workloads were resembling pre-Covid levels. However, members were reporting an estimated 20 per cent of residential projects booked in for 2023 had been rescoped to make them more affordable.
“This is due to increased interest rates impacting on the amount a homeowner can borrow, in combination with the rise in building costs that occurred last year.”
The challenge for 2023 was to ensure builders had a good forward pipeline of work and could retain margins to keep their skilled workers.
“The industry is particularly focused on the latter point, with memories still fresh of the medium to long-term consequences of letting talented people go - they are very difficult to replace.”
Firms resizing was more acute in the commercial build, group home build and apartment development markets compared to the small to medium residential build market.
Fleming said some developments were being put on hold as commercial and industrial building tenants, along with purchasers of spec homes and apartments, withdrew from the market.
“One possible outcome is that builders contracting to developers who no longer have a forward pipeline of work may choose to transition to the small to medium-sized housing market, rather than exit the industry.”
Recessions were not good for any industry, he said.
“For construction, there will be a focus on builders differentiating their service offer from their peers. This will be beneficial to qualified builders versus unqualified builders.”
“Homeowners now faced with builder options will generally select a qualified builder over one who isn’t trade-qualified. This will have a positive impact on the quality level of building work undertaken.”
David Kelly from Master Builders said it was tricky to predict what the remainder of the year would look like.
“Our sector is very used to this cycle. What is different this time from the Global Financial Crisis is that it is more of a gradual softening, and this does give people a little more time to prepare. We have also learnt from the GFC and can use these lessons to navigate our way through this year.
“For many residential builders, there is still a reasonable pipeline of work for the next few months, with the second quarter likely to see a slowdown in residential construction activity.”
If consumers were in a position to do so, now could be a good time to build or carry out that renovation that seemed too hard a little while ago.
“Builders are likely to be more available to discuss their projects and with product supplies starting to stabilise, it will give greater certainty over timeframes and pricing.”
Housing Minister Dr Megan Woods said there had been massive growth in residential construction activity across New Zealand in recent years.
“We’ve overhauled planning laws to make it easier for developers to build, we’re investing heavily in critical infrastructure like pipes and roads to enable new housing, with a massive public housing programme that is adding thousands of new homes to the stock.”
Building consent numbers were still strong, but in anticipation of growing challenges it had put more programmes in place, including the Affordable Rental and Build-Ready Developments pathway and the KiwiBuild underwrite.
“We are in a better position to manage the impacts of any downturn now than we [were], for example, during the Global Financial Crisis, with our strong Government housing and infrastructure programmes, and a banking sector that is still lending for sound developments.”
Under the Infrastructure Acceleration Fund, the Government had also invested $80 million for major transport and water upgrades to unlock housing in Tauriko West and $67.9m for Te Papa Peninsula, while in Rotorua, $85m had been committed to stormwater solutions.
Kiwibank chief economist Jarrod Kerr said the biggest impact, without a shadow of a doubt, was rising interest rates that had risen quickly.
“We’re hearing about a quite significant reduction in activity, and not just in buying and selling, but for residential construction this year. I’ve spoken to dozens of clients who are builders, and they say they have got more than enough work at the moment, but they don’t have as many orders down the line as they usually would, and they’re worried about how things will play out later in the year.”
Kerr expected the housing market would form a bottom this year and improve next year, rallied by an influx of migrants, whose numbers could hit 35,000 this year.
An ANZ spokeswoman said as New Zealand’s largest home lender, “we know it’s important we play our part in getting Kiwis into their own homes, whether they are purchasing a home or planning to build”.
When assessing affordability, it applies a Servicing Sensitivity Rate to take into account the fact that interest rates can move over the term of a loan.
Since launching in July 2021, ANZ had helped more than 8500 customers build a new home – with more than $4.2 billion of lending drawn on the Blueprint to Build rate.
BNZ consumer lending and insurance partners general manager Martin Elliott said last year total home lending slowed compared to the previous year, which included new builds and existing homes.
‘‘But this isn’t unexpected in a rising interest rate environment. As interest rates increase, so do serviceability test rates as banks have an obligation as responsible lenders to ensure customers can manage higher interest rates. Rising interest rates coupled with higher test rates can have an impact on the total amount customers are able to borrow.’'
