1. Construction costs are still pretty flat
The Cordell Construction Cost Index released last week showed a 0.6% rise in the build cost of a standard house in the last three months of 2024. The annual increase was only 1.1%, well below the peak of more than 10% in 2022 and also the long-term average of around 4%. In other words, construction costs have flattened considerably in recent times, which is fully consistent with the continued downturn in actual construction activity.
Looking ahead, the next 12-18 months could start to feel a bit better again for house builders (after a long downturn), off the back of lower mortgage rates, as well as the loan-to-value and debt-to-income ratio rules, which incentivise borrowers to look at new builds. Even so, a fresh boom in house-building activity isn’t really on the cards, and so cost pressures should remain fairly well contained in 2025. That should help households better manage the budgets for their construction projects, with reduced risk that costs will spiral in the meantime.
2. Dwellings consented at a trough?
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Speaking of the construction industry, Stats NZ will publish this week the November data on the number of new dwellings being consented. There have been hints in the past few months that the long downward trend for dwelling consents might now be coming to an end; at a much higher level than the trough we saw after the GFC. Hopefully, there’ll be more signs of this encouraging pattern in November’s data, because the reality is we are going to need to keep building plenty of houses in order to meet future population growth.
3. The soft labour market is a key reason for housing caution
Stats NZ will also publish the filled jobs figures for November, and, unfortunately, we may well see a continuation of the recent weakness – with jobs having dropped every month from April to October (to be 1.5% below a year ago). To be fair, the labour market isn’t imploding. But clearly, any job losses are unwelcome, and this weakness in the labour market is a strong reason to think that the boost to house prices from lower mortgage rates will be less than it otherwise might have been.
CoreLogic chief economist Kelvin Davidson: "Weakness in the labour market is a strong reason to think that the boost to house prices from lower mortgage rates will be less than it otherwise might have been." Photo / Peter Meecham
4. Probably still fixing short, or floating
A busy day for data releases on Monday will be capped off by the Reserve Bank’s figures breaking down mortgage lending activity in November by the terms chosen. There’s been a very strong preference for either floating rates or short-term fixed rates lately, to the extent that only 10% of mortgages taken out in October were fixed for longer than 12 months. By contrast, in October last year, that figure was 51%. With expectations still fairly strong that mortgage rates will fall further (although perhaps not as quickly or by as much as we’ve seen to date), it’ll be no surprise to see a continued focus on those shorter terms in the latest data.
5. Inflation remains less of a concern
Part of the reason why interest rates are expected to fall a bit further is because price pressures across the NZ economy are dissipating. Stats NZ will release its selected price indexes measure for December on Thursday this week, which covers about 45% of the benchmark quarterly consumers price index (CPI), and it is likely to have remained fairly muted. Housing rents are part of this release, and they’re also set to have stayed pretty flat, given easing demand growth for property and the higher supply of available rental listings on the market.
- Kelvin Davidson is chief economist at property insights firm CoreLogic