The cost of building a new home is rising at its fastest rate on record, due to ongoing labor and material shortages.
Real estate research firm Core Logic’s Cordell Construction Cost Index (CCCI), which measures the cost of building a ‘standard’ three-bedroom brick and tile home, rose a record 2 .6% in the three months ending June, compared to a 2.4% increase in the previous quarter.
The annual growth rate also reached a record high of 7.7%, eclipsing the previous record set in the first three months of the year.
“This is the fastest rise in New Zealand CCIC we’ve seen in a decade, and I don’t expect these price pressures to subside for at least two more quarters, given material shortages and labor pressures,” said CoreLogic’s chief real estate economist. says Kelvin Davidson.
Signs of strong underlying demand for new homes were reflected in the number of new housing permits, which continues to hover around 50,000 on an annualized basis.
Just over half of them were for smaller dwellings such as townhouses.
Davidson said while smaller homes require less materials, the volume of those properties in the construction pipeline suggests demand for materials and labor will continue to be high.
CoreLogic’s construction cost estimator, John Bennett, said the rapid cost growth was seen across a range of different categories and business components.
The effects of high metal and lumber prices are rippling through the rest of the market, he said, as they have driven up the price of everything from garage doors to kitchen cabinets.
“Imported products, especially metal-based items and tiles, are increasing, as well as consultant cost increases, affecting preliminary costs.
“It’s important to note that there are other pressures on the industry, with labor availability and overhead impacting costs.”
It was a perfect storm, he said.
He added that it was also important to note that 40% of CCIC was for labor costs, which had increased but not at the same rate as some materials.
“That’s one of the reasons CCIC is showing overall construction cost inflation slower than the public thinks.”
Looking ahead, Davidson said it wouldn’t be surprising if CCIC saw double-digit growth before cost pressures began to ease based on builder workloads in 2023.
“But we would also be a little more confident than in the past that the wider construction industry will not go from boom to bust.
“After all, loan-to-value rules and the tax system now favor new real estate for both homeowners and investors.”
He said a higher “normal” level of demand for new properties should give developers confidence in future market conditions.
The CCIC is based on the comprehensive collection of labor, material, facility rental and subcontracting costs covering all major trades.