Efforts to get more houses built won't gather pace until 2019, the Treasury has forecast, as construction firms report difficulties including getting enough skilled workers.

Banks are restricting lending to developers, and the cost of materials is rising as the construction sector operates near capacity. Land shortages and local planning regulations have also constrained activity.

There has been an apparent softening in demand in the housing market, but Treasury also noted the fundamental drivers of demand have persisted, including population growth and low interest rates.

Treasury has released half-yearly forecasts today, which include a warning that the cost of providing transitional housing has blown out.


The update has factored in spending that will accompany the Labour-led Government's first 100-day plan, including Labour's ambitious KiwiBuild programme.

That aims to build 100,000 affordable homes over the next 10 years, half in Auckland.

Treasury Secretary Gabriel Makhlouf said investment in residential property had fallen this year.

"Residential investment activity is expected to increase only gradually over 2018."

This reflected constraints on the construction sector, as well as subdued demand.

"Growth in real residential investment is expected to gather pace over 2019. And activity is expected to rise to a higher level than forecast in the pre-election update, primarily reflecting the assumed impact of KiwiBuild and associated policies to lift capacity in the construction sector."

Treasury has assumed a range of additional policies will be rolled out. These could include construction work visas to bring in workers, infrastructure funding, pre-fabricated/modular housing, encouraging competition - potentially through foreign construction firms - and buying off-plan.

The half-yearly update states that in the construction sector "measures of capacity utilisation are near record highs" and "the pressure on materials is pushing construction costs higher".


Banks have also become more restrictive when lending to developers, and demand appears to have softened.

"However, the fundamental drivers of demand have persisted, including strong population growth and low interest rates," the update states.

Finance Minister Grant Robertson said the Government noted Treasury's observations on the challenges in the construction sector.

"We are optimistic that we will be able to drive up a lot of efficiencies in that sector. We are also optimistic that the urban development work [Housing and Urban Development Minister] Phil Twyford has under way will also enable us to get on and do the KiwiBuild project."

Twyford said KiwiBuild should boost house-building by 10 per cent by 2022.

"An extra $5.4 billion of residential construction investment will take place over the next four financial years, largely as a consequence of KiwiBuild," Twyford said.

"Wages are forecast to grow faster than house prices for the first time since the global financial crisis, and interest rates are expected to remain low."

Treasury stated the KiwiBuild programme is likely to increase the take-up of the Homestart grant, and that costs could differ from those forecast.

Interest rates are assumed to rise from late next year.

Transitional housing cost blowout flagged

Another warning came over the cost of providing transitional housing, which Treasury said had turned out to be significantly higher than funding appropriated it this year's Budget.

"Additional capital is required to meet the existing supply target of 2155 places, which might require adjusting upwards."

Treasury also noted the Government's commitments to reduce homelessness and improve access to state housing. Policy is yet to be released, but this is likely to have a significant fiscal impact, Treasury noted.