Poor economic conditions aggravating the building downturn in New Zealand

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The dramatic turn in global economic conditions has severely dented business and consumer confidence in New Zealand and has caused dwelling building activity to plunge to record lows, according to leading industry analyst and economic forecaster, BIS Shrapnel.

The current building downturn in New Zealand, particularly in residential building, is being agitated by the domestic recession and deepening global downturn.
BIS Shrapnel’s Building and Construction in New Zealand 2008/09 to 2014 report forecasts building activity to remain weak in 2009 due to a setback in investment which has adversely affected the real side of the economy.

Building activity will be constrained by delays in, or cancellation of, business investment and expansion plans. The housing market will also remain subdued due primarily to job insecurity, rising unemployment and tighter bank lending policies.
Report author and BIS Shrapnel senior project manager Adeline Wong says the sharp downturn is largely attributed to a record low number of dwelling approvals.

“We expect weak dwelling approvals to persist for the whole of 2009, before a modest rebound in the March quarter of 2010,” Ms Wong says.
“Thereafter, a combination of strengthening economic growth, low interest rates, improving home affordability, pent-up housing demand, higher net overseas migration levels and an expanding housing stock deficiency, will drive a strong rebound in dwelling consents in 2010/11 and 2011/12, before stabilising over the following two years to 2013/14.”

Housing stock deficiency

BIS Shrapnel believes the Auckland region will suffer a substantial housing stock deficiency over the next five years as a result of under building.
Dwelling approvals for the Auckland region peaked in 2003 at 12,500 units, and have been falling ever since.

Auckland has the lowest home affordability due to high median house prices, so significant pent-up demand for houses is also expected to have built up in the region over the past few years.

“The dwelling sector will be instrumental in driving the next building sector upturn expected from 2010/11. The reliance on the dwelling sector is because of weak non-residential building activity due to a drop-off in social and cultural building activity, and subdued activity in retail, office, storage and factory building.

“The drop-off in these sectors is due to falling demand and lack of project finance which, combined, will cause projects to be delayed, deferred or shelved.”
However, BIS Shrapnel can see an upshot in all the doom and gloom.

“The silver lining is that, in the short term, the commercial sector will hold up for at least another year, as commercial projects that are more advanced in their construction stages will be completed.” 

Ms Wong says the civil engineering sector will also provide a buffer to the construction sector.
Increased spending on infrastructure of $5.8 billion over the next five years will see the civil engineering sector expand by more than 10% per annum over the next two years to 2010/11.

“This extra spending will enable the completion of projects under construction, and will also fast track new projects,” Ms Wong says.
“The civil engineering sector will also be underpinned by the energy sector and projects such as Meridian’s billion dollar development of five wind farms and Contact Energy’s Waitahora wind farm.