Residential rebound boosts GDP prospects despite commercial softness
New Zealand construction activity was stronger than expected in the September 2025 quarter, with a rebound in housing work more than offsetting softer non-residential building – an early sign the home building downturn may have bottomed.
Stats NZ’s latest building work put in place figures show total construction activity rose 1.5% in the September quarter (seasonally adjusted), following a 2.4% fall in Q2. Residential building work increased 2.8%, while non-residential activity fell 1.3%.
Westpac senior economist Satish Ranchhod (pictured) said the report was firmer than anticipated.
“The residential building cycle looks like it has now found a floor. After falling sharply between 2022 and 2024, building levels have been tracking sideways since the start of this year,” Ranchhod said, noting that “the number of new projects being consented has started to trend higher in recent months.”
Housing pipeline stabilising, but still well below the peak
Ranchhod stressed that activity remains well down on the boom years.
“The level of residential building activity remains around 25% lower than its peak in 2022," he said. "And talking to builders and developers around the country in recent months, we’re still hearing reports of tough trading conditions (especially in regions like Wellington). But we’re also hearing increased optimism about the year ahead as a result of lower interest rates. That’s seen developers starting to bring more projects to market.”
Looking ahead, Ranchhod expects a steady but gradual recovery rather than a sharp rebound.
“Home building is likely to remain around current levels in the near term," he said. "However, with the pipeline of new projects now lifting, we expect to see residential construction turning higher over 2026.
“That recovery is expected to be gradual, however. Although low interest rates are supporting new development, population growth remains low and there have been sizeable increases in the housing stock over the past few years. Those factors are still weighing on house price growth and will also be a dampener on the pace of home building.”
Non-residential construction continues to slide
The official data also showed non-residential building work falling 1.3% in Q3, the latest in a string of quarterly declines. Ranchhod said public sector pullback and weak private investment are both in play.
“Some of the fall in spending has been due to public sector projects," he said. "However, weak economic activity has seen businesses winding back their capital expenditure and has also discouraged the development of new commercial space.
"In our recent talks with businesses, a number of those we spoke to indicated that they’re holding off on major capital expenditure for the time being due to uncertainty about the economic landscape. Consistent with that, we expect some further softness in the near term.”
Other economists note that non-residential activity is now well below recent highs, with elevated build costs and uncertainty around demand likely to limit a quick rebound in commercial projects.
Construction set to support Q3 GDP rebound
Banks are using the building work put in place figures as an early guide to September quarter GDP.
Westpac is forecasting a 0.4% rise in GDP over the September quarter. Ranchhod said the construction result “was stronger than forecast and follows firmer indications for the retail sector,” adding that the bank will “take a closer look at how our forecast for GDP growth is shaping up over the coming week as additional data on September quarter activity is released.”
ASB economists have estimated that the 1.5% lift in building work volumes translates to about a 1.5% rise in construction GDP in Q3, contributing roughly 0.1 percentage points to their forecast 0.7% increase in overall GDP. They note that overall building activity is still around 5% lower than a year ago and about 20% below mid‑2022 peaks.
Regional data show a broadly based upturn in Q3, with values jumping in most regions except Wellington, and the strongest gains in Auckland and in areas outside the major centres in both the North and South Islands.
Outlook: Supportive rates, weak population growth and cost risks
Looking ahead, economists see a cautiously improving picture for construction, underpinned by lower interest rates, and a sector that has already retraced from its 2021–22 stimulus-driven highs. However, weak population growth, a patchy housing market and the risk of construction cost inflation returning in 2026 are expected to cap the speed of any recovery.
For mortgage advisers, that means a market where the worst of the residential downturn may be behind us, but deal flow will likely build only gradually – with stronger opportunities in regions where activity and affordability are more favourable, and continued pressure on commercial projects as businesses remain cautious on major capital spending.
For more insights, read the Westpac and ASB reports.
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