Quantity Surveying - Inflation calming on construction costs

Inflation on commercial construction costs continues to be more than double the overall inflation rate.

According to the latest forecast by the New Zealand Institute of Economic Research (NZIER), non-residential construction costs will fall slightly for the rest of 2017 by still remain above 4 per cent, while national overall inflation sits at 1.9 per cent.

In the first half of the year, construction costs experienced 5.5 per cent inflation increases, but that has now dropped to 4.3 per cent. Rising costs are still an issue for everyone in the building industry, though the NZIER says we have seen it worse.

"Despite the solid construction growth outlook for the next three years, we do not expect the inflation to be as sharp as the mid-2000s given that the lower inflation environment limits the extent to which rising costs can be passed on quickly, and strong net migration is helping to mitigate skills shortages in the building sector," its report said.

The stream of commercial development projects predicted remains high, as it is helped along by New Zealand's growing employment and tourism sectors. “Continued strong tourist inflows are driving demand for new hotel developments, while employment growth underpins further demand for new office space,” says the report.

The NZIER maintains that the shortage of skilled workers, as we wrote about in a previous Industry Insight, remains a pressure point in keeping construction costs at a higher rate of inflation than we're generally seeing in other industries. The current shortage is as acute as the Kiwi construction boom circa 2004.

An inflation drop of 1.3 per cent from the beginning of 2017 is still nothing to scoff at; 4.3 per cent is generally classified as “moderate” inflation rather than “high” inflation.

Here in Canterbury, consents for commercial projects have been in decline with much of the non-residential rebuild complete, however 2018 still looks positive. "Although earthquake rebuild activity has peaked, non-residential construction demand in the region should remain at a relatively high level over the next year given population growth and continued improvement in rural sector profitability," NZIER says.

While costs are moderating elsewhere in New Zealand, Auckland's construction cost inflation in the residential market is where things are really being felt. At over 8 per cent inflation, the Auckland region's inflation is significantly pushing up the national average.