3 Oct 2023

Construction activity slows as interest rates and building costs rise

6:02 am on 3 October 2023
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Photo: 123RF

A significant drop in consents for new residential buildings is expected to result in a material drop in construction activity and take some of the heat out of the economy.

Stats NZ reported the number of building consents issued had fallen to its lowest level in nearly three years with a seasonally adjusted drop of 6.7 percent in August, following a 5.4 percent drop in July.

Westpac senior economist Satish Ranchhod said the drop in consents would likely see construction activity fall by 16 percent from its recent peaks.

"The downturn in consent issuance follows the sharp rise in interest rates and building costs over the past year, along with the related falls in house prices," he said.

"Those conditions have seen many prospective buyers stepping back from the market, and also meant that developers have been cautious about bringing new projects to market."

He said the increase in net population, along with the downturn in new housing construction, could reignite inflationary pressures and Westpac expected the Reserve Bank will need to raise the official cash rate one more time at its November meeting.

On the other hand, he said the material downturn in construction activity could be just what the economy needed.

"We think that the slowdown that we're seeing in the construction activity is going to be a pretty important development for the economy. It's one way that the heat is coming out of economic activity."

And while residential construction had cooled, Ranchhod said industrial property continued to be a star, with activity in the office and retail spaces more modest.

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