'Still a lot of pain' even as rising cost of building a house slows

The cost of building a house is increasing at a fraction of the pace of recent years, but some involved in the industry say the price is still too high.

Corelogic's latest Cordell Construction Cost Index showed the cost of building a standard single-storey, three-bedroom two-bathroom standalone house increased by 0.6 percent in the December quarter.

That's half the rate of the third quarter. The annual rate slowed to 1.1 percent, down from 10.4 percent in 2022.

Corelogic head of research Nick Goodall said the slower increase was not surprising.

"We know the slowdown in the construction sector will generally flow through to less price increase as well."

Covid-related supply chain pressure was gone, and the cost of labour was easing as well, he said.

"People are having to price more competitively for jobs because there are fewer jobs out there."

The cost of carpet was up 3 percent in the quarter, wall insulation 3 percent and plasterboard 4 percent.

But external timber products dropped 5 percent and kitchen joinery costs 3 percent.

Goodall said lower interest rates would help the construction sector's recovery, but it could take some time.

"Confidence will take a bit longer to come back, for people to go 'yes, I want to engage in a new build', There are still plenty of stories about the economy struggling, construction firms struggling, it's a leap of faith to commit to a new build that won't be complete for 12 to 18 months."

But he said there were incentives to encourage people, particularly investors, to look at new builds and that could become more of a factor.

"You don't get tested for debt-to-income ratios if you're building new, you don't need to have a 30 percent deposit if you're an investor if you're building new.

"Interest rates have fallen and if you want an investment property, there's more incentive to build new than buy existing. But it might be another six months before we truly see that confidence and demand come back for new builds. By the second half of this year, maybe that's when we'll start to see things lift up again."

The founder of Simplicity KiwiSaver and building firm Simplicity Living, Sam Stubbs said it was surprising that costs were going up at all, given how weak demand was.

"I think if we had a proper, efficient industry, we would have prices coming down to stimulate demand. But we don't."

It was hard to make building stack up at the moment, particularly for people who were reliant on presales or bank funding, he said.

While Goodall said regulatory moves such as allowing more intensification around transport corridors would help stimulate the industry, Stubbs said that was probably still some time away.

"A lot of building is predicated on financial models that assume an increase in house prices. That's a pretty heroic assumption. We need to get used to housing - in real terms or as a multiple of income - staying flat or going down versus going down. We've had a long period of real house price increases and the economy has been dependent on that but houses are just unaffordable."

He said to get proper supply-led growth in construction, costs would have top come down more than 25 percent. "That's going to require a fairly major rethink from a lot of people."

Infometrics chief executive Brad Olsen said some pressure could come back on construction costs this year as interest rates dropped and activity lifted.

"We also think there's a bit of downside risk to that given how much we are hearing from the wider construction sector about the level of discounting going on.

"You are hearing a lot more stories of people who are discounting jobs quite a bit, materials firms not pushing through price increases because they don't think people will pay them."

While the sector might be near a turning point, "there's still a lot of pain happening", he said.

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