Bleak Winter for Construction in New Zealand

Whilst the UK bakes in Mediterranean conditions New Zealand is in its mid-winter season with temperatures averaging 10c, this report indicates that the outlook for construction is also wintery in nature.

New home build inquiries have declined steeply since last year, and residential construction intentions have plummeted – but the industry expects it will avoid a global financial crisis-style crash this time around.

ANZ’s latest business outlook shows residential construction intentions have plummeted to a fresh low, down to a net -73.7% in July from -57.9% in June.

A reading of zero would mean the sector was evenly split on whether the outlook was positive or negative.

The bank’s chief economist, Sharon Zollner, said it was a “truly spectacular crash” in sentiment, and the outlook for house building had hit a brick wall.

New home consents are now dropping, and ANZ’s business outlook data suggests they may have a lot further to fall yet.

Consents are currently at historic highs, with 50,736 issued in the year ended June. But, on a monthly basis, the number of dwelling consents fell 2.3% in June, and it was the third monthly decline in a row.

With ongoing rises in costs, delays due to supply chain issues, and a string of building company liquidations, no-one expects the construction boom to continue, but there is much speculation around how bad the fall-out could be.

Recently, there have been reports of a significant drop-off in new build inquiries. Some estimates suggest an 80% to 90% decrease, but Master Builders chief executive David Kelly says hard data on this is difficult to come by, and no-one really knows how much inquiries have fallen by.

Group home builders, such as Signature Homes, Stonewood Homes and Jennian Homes, say demand is lower than it was previously, and inquiries and sales have slowed.

Building Industry Federation chief executive Julien Leys says the decline in new build inquiries is marked. Some group home builders, which do 50 to 100 home developments, have seen orders drop off the cliff, he says.

“One builder had 48 homes that people had signed up for, and those buyers have all now walked away from them. That is a huge change in order numbers, and it hits hard. The level of demand has fallen, and an industry slowdown is on the way.”

The record level of consents issued over the last year is unlikely to be matched by an equivalent number of new homes, as New Zealand has never built more than 40,000 in one year, he says.

“But the high consent levels do mean many builders have order books which are pretty full for the next 12 to 18 months. The question is what will happen when that pipeline of work has been worked through? What will be happening early next year?”

One handbrake for the industry is escalating costs. Leys doubts this will change any time soon, primarily because of freight costs. Trans-Tasman shipping costs were up by 40% in July, compared to the same time last year.

Another handbrake is the lack of skilled labour, with a new EBOSS survey showing 91% of builders think there are not enough staff to hire. This contributes to project delays, and cost increases.

These factors mean a downturn is on the way, and there will be more company insolvencies, Leys says. “But the sort of crash that occurred in the GFC is unlikely as the fundamentals behind that scenario are not there now.”

Home-buyers are wary about new builds due to the cost issues, but another reason for the slowdown is the tough lending environment created by the CCCFA rules and banks’ tighter criteria, Kelly says.

“It looks as though banks are starting to rethink that for some, and that will help. There are other counter-balancing factors at play too. One is the existing pipeline of work, which will take time to work though.”

Another is the Government’s commitment to supporting home building through the Affordable Housing Fund and Kāinga Ora, he says.

“The timing of the fund is important as it will help to derisk the situation for some development. There is also a big pipeline of work with Kāinga Ora. This won’t solve all the problems, but it will help, and it is something that was not there last time.”

There will be pain ahead for some as that is always the case in this type of environment, Kelly says.

“But the industry has been on a continuous upward trend for about 10 years, a particularly long growth cycle. It always had to come to an end, and now we are going to see a correction, rather than a crash.”

Demand for builders and new builds has far exceeded supply in recent years, and the coming downturn is likely to change that, Certified Builders chief executive Malcolm Fleming says.

There will be some shaking out within the industry, but it will be more of a realignment after an extraordinary boom time than a crash, he says.

“New Zealand still has a housing deficit, and the Government has been working to get away from the boom-bust cycle we’ve had in the past. So there is Kāinga Ora work that needs to be done, as well as some iwi social housing projects.”

There is also the retirement home building space, which continues to grow, and demand for work in the renovation and refurbishment remains strong, he says.

“For consumers who want to build, there will now be more opportunities for them to get the builder they want and to work with their builder closely.

“But cost concerns mean there is likely to be a realignment of expectations around the size of the house they need as the bigger it is, the higher the cost.”

There is still buyer demand out there, but many buyers are sitting on the sidelines because they can not get finance, or because they want to see what happens with the market, Waikato developer John Kenel says.

“The market has slowed, more than it should have because of the tighter LVRs and the CCCFA rules. Now, the only people buying and selling are those who have to, so there has been a big decline in new build inquiries.”

But while there are fewer inquiries, which affects orders, the inquiries he is getting are more serious, he says. “There was a lot of speculation, people buying off-the-plan and hoping to flip, and that has gone.”

Kenel, who is chief executive of Assured Property, thinks the market will stagger along until something changes to offer more certainty to buyers. That might be a reduction in the LVRs, or a stabilisation of interest rates.

“Builders and developers are affected by the downturn in the cycle, but that is what it is – part of the cycle. I’m not panicking, and I don’t think the bottom will drop out of the market. People need homes, and property remains a stable and secure asset.”

Economist Tony Alexander says consent numbers will fall away rapidly, and a fair amount of those already issued will not be built.

“Lots of people are over-exposed as the high level of demand for new builds has dropped off, and many of the inexperienced and over-optimistic would-be developers who entered the market will see failure.”

But there will not be a repeat of the industry crashes of the 1970s, when consents dropped from 40,000 in 1975 to 15,000 in the early 1980s, or the GFC, when consents dropped from 26,000 in 2007 to 13,500 in 2011, he says.

“Back in the GFC, mortgage rates were at 10.5%, while unemployment jumped from 3.6% in late 2007 to 6.1% by late 2010, and stayed close to 6% through to 2013.

“This time round, unemployment is not likely to go much further than 4%, some fixed mortgage rates are already coming back a bit, and credit is starting to flow a bit more freely than it was earlier this year.”

He believes buyers are still round, but waiting in the shadows to see what happens with interest rates and house prices.

“When there is more certainty, they will re-enter the market, but over the next year or so we’ll see a collective focus on falling consent numbers. This will be a mild reality check for the home building sector, but it won’t be a horror show.”

Source: Stuff