House building costs have risen at their strongest rate in nearly two years, according to Cotality's Cordell Construction Cost Index. Photo: RNZ
House building costs have risen at their strongest rate in nearly two years, suggesting the slowdown in cost growth has reached the bottom.
Cotality's Cordell Construction Cost Index showed a growth rate of 0.6 percent for the three months ended June, for an annual rate of 2.7 percent, the strongest since the third quarter of 2023.
Chief property economist Kelvin Davidson said the increase was partly a reflection of the removal of a 1.1 percent fall a year ago and might not signal a return of price pressures.
"Although the annual growth rate has nudged higher, it's important to recognise this is more about base effects than any significant reacceleration."
Cotality chief property economist Kelvin Davidson. Photo: SUPPLIED
At the peak of the pandemic building costs surged 10.4 percent, and the long term average was 4.2 percent, but Davidson said the sector had seen increased spare capacity as the number of houses being built has fallen sharply.
"That decline has taken the heat off both wages - which account for around 40 percent of the index - and material costs, which represent roughly 50 percent."
The index is based on the cost of building a standard single storey three bedroom house, with two bathrooms in brick and tile.
Build costs still high
The report showed varying price moves among key materials with weatherboard 6 percent higher but decking timber and ceiling batts 1 percent cheaper.
"Cost movements are now being driven by specific supply and demand dynamics rather than broad-based inflation," Davidson said.
However, he said building costs remained high even if the growth was contained.
"Households can be more confident costs won't run away during a project, but the total cost to build remains a hurdle. With ample existing stock on the market, builders may still face challenges attracting new projects in the short term."
Davidson expected a gradual pick up in the construction sector with population growth, easing interest rates and the loan-to-value and debt-to-income lending restrictions favouring new builds.
"Cost growth may well have bottomed out, with some renewed upward pressure possible in 2026. But a return to the double-digit growth rates of 2022 seems unlikely."
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