New Zealand building costs are expected to moderate given the low inflation environment, an inability to pass on rising costs, and as migrants help fill building skill shortages.

Non-residential construction cost inflation will fall to a 4.3 per cent annual pace in the final quarter of this year, from 5.5 per cent in the second quarter, according to a forecast by the New Zealand Institute of Economic Research for property consultancy Rider Levett Bucknall's fourth-quarter report on trends in property and construction. Still, the NZIER says it expects annual construction cost inflation to remain "relatively high" at over 4 per cent through to 2019.

Construction costs have been rising at a faster pace than overall inflation, with data released today showing consumer prices accelerated at an annual pace of just 1.9 per cent in the third quarter. Construction industry demand is being underpinned by record tourism and migration levels although higher construction and funding costs and capacity pressures are seen limiting the extent of future growth.

"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," the report said


Although construction activity softened over the first half of 2017, architects surveyed on their own activity levels by the NZIER showed a pick-up in the construction pipeline across residential, non-residential and government work.

"Non-residential construction eased over the first half of 2017," the report said. "This contraction in construction activity is likely to be temporary. Continued strong tourist inflows are driving demand for new hotel developments, while employment growth underpins further demand for new office space."

The report notes that Auckland continues to lead the way in construction demand, although higher construction and funding costs and capacity pressures will likely limit the extent of growth in construction activity.

"The relatively high construction cost inflation in Auckland indicates capacity pressures in the Auckland construction sector are more acute than in other regions," RLB Auckland director Geoff Speck said in a statement. "Annual growth in Auckland residential construction costs remained steady at just over 8 percent, in contrast to the moderation in construction cost inflation in the other regions," he said.

Migrants had helped to ease labour shortages in capacity constrained sectors such as construction, with growth in work visas over the past year led by jobs in trades, he said. However, building sector firms continue to report difficulty in finding labour, with labour shortages for skilled workers as acute as that experienced in the previous building boom in 2004.

With stronger population growth in Auckland likely to support construction activity at high levels, construction cost inflation in the region is expected to remain relatively high, he said.

In Wellington, robust demand for new hotels and retail outlets over the past year had been offset by lower demand for office buildings and industrial buildings. Meanwhile, in Otago, demand for new hotels and retail outlets had fallen over the past year.

In Canterbury, non-residential consent issuance continued to decline, reflecting lower demand for health and education facilities, the report said.


"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," the report said.