RBNZ sees pressures building in Auckland construction sector

Thursday 10th November 2016

The Reserve Bank is wary of emerging pressures in the construction sector, saying local building firms may not have the capacity to cope with an increased workload in Auckland.

Central bank officials met with 20 construction companies as part of its preparation for today's monetary policy statement, which noted "a sense of hesitation among construction firms to expand rapidly in Auckland given uncertainties around the outlook". The country's biggest city has a shortage of housing to cater to a rapidly expanding population and accounts for the bulk of an estimated $37 billion pipeline of building work in New Zealand over the next five years.

New Zealand's construction sector is dominated by small firms, and governor Graeme Wheeler told a media briefing that a number of those firms were worried about scaling up to meet demand, with costs increasing and the availability of land deterring them from investing in large developments.

"What we did find was construction cost inflation in Auckland running at around 8 percent, that there was some redirection of business away from Christchurch and into the Auckland market, but that some of the firms were really quite concerned about scaling up their activity," Wheeler said. "They've seen stop-start cycles before, they've been reluctant to invest previously in terms of not seeing the land available for them to commit to large-scale development, so that was very much on their mind."

Construction accounts for about 6 percent of New Zealand's gross domestic product, up from 5.1 percent five years ago before the Canterbury rebuild revived activity in the sector, and companies have been complaining about the difficulty of attracting staff, despite the country's expanding workforce.

Government data show residential building capital goods prices rose 5.1 percent in the June quarter from a year earlier. Non-residential building capital prices were up 3.3 percent, while input prices for the building construction advanced 1.1 percent. Employment data for the September quarter show the labour cost index - which measures wage inflation - rose 2.1 percent for the construction sector from a year earlier, while average hourly earnings increased 2 percent to $27.79.

Building firms told the Reserve Bank access to labour, materials and funding could "impede future activity", with the labour shortage most acute in Auckland and shortages of certain construction materials leading to some companies facing long wait-times and mounting costs.

Tighter lending criteria had also constrained some companies' ability to increase activity, with new and small firms, and apartment developers hit the hardest.

"A lack of funding has led to some construction projects being deferred or cancelled, and contacts expect that credit conditions will continue to tighten," the Reserve Bank said. "Changes to retentions policy and increased demand for bonding (the provision of liquid assets as assurance that work will be completed) are reportedly putting even more pressure on construction firms' cash flow."

The Reserve Bank said the industry was fragmented and struggles to achieve large-scale construction and innovation, which "could impede high-density construction and intensification in Auckland." New procurement models and prefabricated housing were seen as a positive and necessary step and the entry of a large multinational building firm could provide scale and new technology to the sector, it said.

BusinessDesk.co.nz

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