Commercial builds drop, but homes offer a glimmer of hope
A glimmer of hope has emerged for New Zealand’s construction sector, as recent data indicates a flattening of overall building activity in the first quarter of 2025, potentially signalling the bottom of a prolonged downturn. While the sector remains soft, a notable rise in residential building work has provided a modest offset to ongoing declines in non-residential activity.
Residential recovery begins to stir
A report from Westpac IQ noted that total construction activity remained flat in the March quarter, a result stronger than market expectations for a modest decline. This stability masks contrasting movements beneath the surface. Residential building work saw a 2.6% increase in the early part of the year, marking the first quarterly rise in residential building volumes since September 2022. This uptick offers some comfort to economists who have long viewed the sector as retracting from the stimulus-driven highs of 2021 and 2022.
Despite this positive movement, residential activity still faces a “long road ahead” to full recovery, ASB Economics & Research economists noted. The current level of residential construction activity remains about 25% lower than its peak in 2022. However, signs of stabilisation are visible, with consent issuance remaining broadly steady over the past year. This suggests that building activity is likely to hover around current levels in the coming months. A more significant turnaround is anticipated later in the year, bolstered by recent interest rate reductions and a gradual firming of the housing market.
Non-residential weakness deepens
In contrast, non-residential building activity experienced a 3.9% decline in the first quarter, continuing a downward trend observed over the past couple of years. This weakness is attributed partly to a pullback in public sector projects, such as those related to public transport, hospitals, and education buildings. Furthermore, weak economic conditions have led businesses to scale back capital expenditure and discouraged the development of new commercial spaces. Elevated costs are also believed to be hampering larger-scale projects. Westpac IQ senior economist Satish Ranchhod anticipates further softness in the non-residential segment through the middle of the year.
The broader recovery of the construction sector hinges on several key factors, primarily the significant flow-through of lower interest rates to alleviate financing costs and stimulate demand. While less volatile price hikes in building costs could ease conditions for builders and investors, building costs remain elevated in real terms, continuing to act as a “handbrake on momentum” within the sector, according to ASB Economics & Research economists.
For the first quarter’s gross domestic product (GDP) estimate, the flat building work volumes still point to a broadly flat outcome for Q1 construction GDP. The overall Q1 GDP headline estimate remains at 0.4%. Further data on March quarter activity, including the Q1 Business Financial Data, will be incorporated into final GDP expectations, with a preview set for release early next week.
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