Sector still ‘bumping along the bottom,” says BNZ economist
New Zealand’s residential construction sector may be through the worst of its downturn, but the timing of any recovery remains uncertain, according to BNZ chief economist Mike Jones (pictured).
“Residential construction punches above its weight when it comes to influencing NZ’s economic cycle,” Jones said. “The sector’s direct contribution to economic activity, at 6-7% of GDP, may not be massive. But it’s a large employer (8-10% of jobs) and has strong cyclical ties to other parts of the economy like manufacturing, forestry, durables consumption, and logistics.”
Construction was a major drag in the June quarter GDP report, which showed a 0.9% contraction. The volume of residential building work fell 1.9% – the seventh decline in the past eight quarters.
Consents stabilising, but activity subdued
Jones noted that building consents have levelled out after steep declines.
“Building consent numbers suggest we’re broadly at the bottom of the cycle,” he said. “Consenting activity for stand-alone houses stopped trending lower about 18 months ago. More recently we’ve seen the stabilising trend extend to townhouses and renovations to existing dwellings.”
Some regions, such as Otago, continue to buck the downturn. Consent values there are now 9% above their 2022 peak, reflecting ongoing activity in Central Otago and Queenstown-Lakes.
Even so, the overall market remains weak.
“Looking at total consented floor area (per capita) provides a different angle on current levels of building activity. The picture is noticeably weaker relative to history with current consenting activity 12% below the long-term average,” Jones said.
Funding costs improve, but margins tight
Falling interest rates are providing some relief for builders.
“Funding considerations for the residential building sector have moved in a favourable direction over the past 12 months. Our expectation is that this trend has further to run,” Jones said.
“The official cash rate (OCR) has been cut 250bps in a year. What’s more, some wholesale and retail borrowing rates, like those for a 12-month term, have fallen by more than this as additional easing is anticipated. We expect two further 25bps cash rate cuts, taking the OCR to a 2.50% cycle low.”
At the same time, high building costs remain a barrier. Construction costs are still 35-40% above 2021 levels, while house prices have flatlined.
“The ratio of the two – a rough ‘incentive to build’ proxy – thus continues to bobble around levels consistent with flattish construction activity,” Jones said.
Migration slowdown weighs on demand
Jones also pointed to weaker population growth as another headwind.
“For about 12 months now, growth in the population has undershot growth in the dwelling stock,” he said.
Net migration fell to just 13,000 in the year to July, and while BNZ expects inflows to lift to 30,000 in 2026, the gap between housing supply and demand could keep pressure off prices.
“Evidence of marginal supply growth outpacing that of demand is on show currently in the housing and rental markets. New tenancy rents are falling at around a 2% annual pace and house prices have resumed small declines over the past three months,” Jones said.
Recovery likely to lag broader economy
BNZ still expects some recovery to emerge from late 2025.
“Our overall read of the key macro fundamentals doesn’t invalidate our forecasts for a modest recovery in residential construction activity from around the turn of the year. But it does provide a sense of the risks being to the southside of this forecast,” Jones said.
“In the least, construction looks set to lag the broader recovery. And absent any pick-up in migration or house prices, there’s a risk activity could stay flattish for a good portion of 2026.”
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