Earthquake reconstruction to revitalise sector

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The New Zealand building sector will rebound from its lowest level in 10 years as the country continues to fight back from devastating earthquakes in Christchurch despite lower activity levels in other regions, according to leading industry analyst and economic forecaster, BIS Shrapnel.

But BIS Shrapnel’s Building and Construction in New Zealand 2011/12 – 2017 report warns that the numerous aftershocks are having a psychological impact on home owners’ decisions on when and if to rebuild.
“The building sector in New Zealand for the year ending March 2012 has remained subdued at decade-low levels, but it is forecast to rebound 50% for the year ending March 2013,” according to report author and BIS Shrapnel senior project manager Adeline Wong.

“This rebound will be backed by earthquake reconstruction activity in Christchurch and a rebound in dwelling building activity in Auckland, in particular.”
Reconstruction in Christchurch and a rebound in activity elsewhere in the country will sustain annual consent value (not including infrastructure construction) at historical high levels over the five-year forecast period to 2016/17, with annual average consent value at around NZ$10 billion on BIS Shrapnel’s current estimate (potentially higher when all earthquake damage claims are processed), compared to an annual average of NZ$7 billion over the previous 15 years.

Remediation work on leaky homes and schools is also expected to contribute to the building sector growth over the forecast period.
Dwelling consents are forecast to rebound from a 20 year-plus low of less than 15,000 units per annum in the past two years, to peak at 25,500 units in 2014/15. At this level, it still remains below the annual average of 30,000 units over the boom years of 2003 to 2005.

This lower activity level is ascribed to higher construction costs resulting from earthquake reconstruction in Christchurch, which will constrain building activity in other regions in the country.
Also, outside of Christchurch, building activity is expected to soften as home affordability worsens again in 2015, due to rising house prices and mortgage rates. As a result of supply shortage — especially in Auckland — house prices are expected to again escalate once demand for houses gathers momentum.

Although affordability will continue to act as a drag on building activity in the second half of the outlook period, a shortage of housing supply and a reversal back to net overseas migration gains will underscore house prices, especially in Auckland and Wellington.
Building consents in the “other” dwelling sector over the next five years is expected to hover closer to the underlying demand level for apartments — which is around half of the levels between 2003 and 2005 when high activity levels were driven by the construction of smaller student accommodation units.

While Christchurch reconstruction will provide a major boost to the non-residential building sector over the five-year forecast period, a pick-up is also expected in new building and refurbishment activity in the warehouse, factory and office building sectors in the North Island over the coming years, in response to stronger economic growth.
Office refurbishment activity is expected to strengthen, as owners compete to retain tenants amid oncoming new office supply. Leasing activity for commercial properties is expected to gather pace on stronger domestic and global economic growth in two-to-three years’ time.

“The office building sector may have an upside if seismically-compromised buildings in Wellington require strengthening work to achieve low risk status and improve their capital values,” Ms Wong says.
“Furthermore, hundreds of government buildings and schools in the capital city are being assessed to determine the level of risk, and whether they need to be vacated and earthquake strengthened.”

Downside risks to forecasts
However, there are downside risks to BIS Shrapnel’s building forecasts. Besides the known uncertainties posed by global economic issues such as the euro-zone sovereign debt crisis, the New Zealand construction industry is also facing uncertainty in the wake of continued fairly large aftershocks in Christchurch in recent months.

“Numerous aftershocks are continuing to rattle the nerves of householders, and having a psychological impact on home owners’ decisions as to whether and when to rebuild, stay or relocate to other regions,” Ms Wong says.
“Hence there are stronger downside risks to our dwelling consent forecasts for Canterbury and the South Island.”

The non-residential building sector’s downside risk is in the uncertain rebuilding outlook due to funding constraints, insurance issues and whether owners of quake-damaged properties will commit to redevelop, and their timeliness in redevelopment.
Further delays will push some reconstruction consents further out to 2013/14 and beyond.