8 key trends affecting NZ construction costs in 2024
March 20, 2024
Rising construction costs are finally easing, reflecting a somewhat improved economic outlook at home and abroad — and yet the myriad components that make up these costs are continuing to fluctuate due to a variety of factors.
Here are some of the key trends affecting construction costs in 2024, according to CostBuilder quantity surveyor Martin Bisset.
Geopolitical instability
The fighting in Ukraine continues to rage more than two years after Russia first began its invasion. The ongoing conflict’s effect on global food and oil prices has steadied now, but an escalation in the conflict could pose a further risk to geopolitical stability and therefore impact costs in the future.
The Israel-Hamas war has not affected the global economy as much, but there could well be a knock-on effect for construction costs with cargo avoiding the Suez Canal, leading to longer delivery timeframes and therefore additional costs.
The cost of freight
Trading Economics’ Containerized Freight Index tracks current freight prices for container transport out of the most important ports in China, one of New Zealand’s largest importers of goods. It shows that the cost of freight is currently 77% cheaper than its peak in January 2022.
However, it also shows that the cost of freight has grown by 7.17% since the start of this year, so it appears to be trending upward once more.
Oil prices
The cost of a barrel of oil continues to fluctuate — peaking at $117.73 in the middle of 2022, compared to a cost of $81.57 at 18.03.24 from Trading Economicx .
Although diesel is not a major influencer in construction costs, it is used for manufacturing and in most plant items (excavation machinery, hoists, concrete trucks, material delivery trucks, etc.), so any increase in fuel prices must also be reflected in the cost of construction.
One positive thing to note is that the Auckland fuel tax is coming off on 30 June, which will see the price fall 11.5c (including GST).
Exchange rates
As we rely on importing a large amount of building materials in this country, the strength of the Kiwi dollar will always greatly impact the cost of construction. Its buying power has reduced from a recent peak of nearly 70c compared to the US dollar in 2021, to just above 60c at the time of writing.
The new government
New Zealand’s new government has been in power for over 100 days now. One of its primary goals is a reduction in spending, which affects the building of new schools and hospitals. However, there is a change planned to make it easier to import overseas materials for use in construction and unlocking land for housing.
The latter would see councils in major towns and cities be required to zone land for 30 years’ worth of housing demand immediately. They will have more flexibility about where houses are built by being able to opt-out of the Medium Density Residential Zone law, but central government will reserve powers to ensure councils set aside enough land to meet demand targets.
Interest rates
Though inflation is reducing, it’s not reducing quickly enough for the Reserve Bank, which maintained the Official Cash Rate (OCR) at 5.5% in February. This obviously has a major bearing on the cost of borrowing, with interest rates remaining relatively high in the short to medium term. When interest rates will reduce and by how much remains to be seen, and ultimately depends on inflation being contained.
Material supply prices
The cost of insulation has reduced by 3% in a year, with structural and reinforcing steel experiencing even larger annual reductions of 19% and 23% respectively. However, the cost of concrete and plasterboard has increased by 10% and 2% respectively over the same period.
All of these building materials are about a third more expensive than they were before Covid-19, except structural steel, which is still 81% more expensive despite recent reductions.
Rising labour costs
Stats NZ labour cost indices have increased by about 4% per year since 2019, including in the year ending December 2023. However, since March 2022 Stats NZ has collated construction trade worker indices and this is currently sitting at an annual rate of 5.5% to December 2023.
Labour shortages have been an issue in the Covid-19 era, but are expected to continue to ease with increased immigration.