Building Industry Feels The Winds Of Change
The new trends are set to grab the attention of those with skin in the property game, writes Jeremy Gray.
1 January 2023
ABOVE Price increases of 5 to 30 per cent have been seen across almost every building product.
In the middle of last year the building sector was in full swing.
The OCR was at a record low 0.25 per cent, along with tens of billions of stimulus fueling all aspects of the property market. The big challenges were the inability to produce or import building supplies fast enough, difficulty in securing tradespeople, and consent delays.
The winds of change are here, and through the thousands of jobs which Builderscrack facilitates each month we’re seeing several trends that will be of interest to those with skin in the property game.
At the time of writing, the latest annual inflation data is 7.2 per cent (MBIE). Diesel is up just shy of 100 per cent (MBIE) in 2022 over 2021. Of some relief might be the World Container Index (Drewry) seeing a sustained fall in shipping costs, down 80 per cent from 2021 but still up 30 per cent from pre-Covid levels.
We’ve observed specific price increases of 5 to 30 per cent across almost every building product, with bulky or imported finished materials seeing a sharper rise. According to the EBOSS Construction Supply Chain Report, 90 per cent of construction products sold in New Zealand are either imported finished products or manufactured locally from at least some imported components.
Adding to this, many products had a ten-fold increase in freight costs across 2021.
TRADES AND PRICES
For example, while store bought prices for GIB products only lifted around 10 per cent across 2021 and 2022,
Fletchers recently announced a 15.4 per cent price increase for the product line in 2023 due to increasing energy and raw material costs.
We have observed a relatively smaller increase in labour costs across the trades. Trades with a greater degree of scarcity have seen slightly higher increases, including plumbers, gas fitters, masonry and waterproofing experts. Rates for painters, decorators and flooring installers have risen more modestly. We expect labour costs to
increase in line with inflation, and with smaller operators typically competing against larger operators on this, labour costs are one of the more competitive
Overall, building activities have been at the sharp end of NZ’s inflation drivers, with the cost of building a new house up 18.3 per cent in the year ending June 2022 (MBIE). We don’t see much room for these costs to fall other than for the market to find a new equilibrium over the coming months and years.
There is some hope that changes in the Resource Management Act (RMA) will at least reduce consenting costs.
BACK IN THE BLACK
Building materials are again mostly available without the delays we’ve experienced over the last couple of years. We’re seeing the time reduce substantially from when a job is posted on Builderscrack to when the job is started.
For renovations, at the height of supply shortages, we saw an average wait time of three months between job post and job start; that’s now down to around a month.
Builderscrack’s Trade Demand Index (Trade Insights by Builderscrack) tracks the “heat” that trades are feeling from demand month to month. We produce it from a range of real time data points that drive our service, such as the strength of interest in jobs from our trade businesses, and time between a job being posted and started. It’s demonstrated to be an accurate real time pulse of demand on the building sector.
Traditionally, the number of new home consents is used to measure activity. While there has been a sharp 22 per cent drop in consents from September to October 2022 (Stats NZ), Builderscrack’s Trade Demand Index shows a 45 per cent drop in heat from April through to October, with it falling below the historical average in August 2022.
Potentially confusing this picture is a recent Stats NZ release estimating a rise in residential building activity of 3.1 per cent in the September 2022 quarter over the June 2022 quarter (price changes and seasonality removed).
We think what these insights point to is the building sector, or more specifically labour within the sector, still running at capacity, but with a shortening pipeline of work. There are clear early indications that the winds are changing through consents data and our Trade Demand Index.
This points to the likelihood that those undertaking projects will find it less challenging to secure tradespeople into the coming months. One caveat is especially on larger projects, clients should be diligent in establishing the financial health of their project manager and major trades.
With the volume of consent applications dropping, council resources are freeing up. This may not necessarily mean a smoother consenting process,
but it should mean consents and Request for Information (RFI) responses are processed faster.
We’ve seen the average project price of discretionary renovations drop 46 per cent for the year ending September 2022 from the previous year. These renovations are typically non-consented bathroom, kitchen and general interior renovations. While it was common to see full kitchen replacements, we’re now seeing clients
save costs by just having doors, drawer fronts and hardware replaced.
Bathroom renovations more often involve selective improvements rather than full gut-outs and rebuilds. Renovations involving reconfiguring walls are less common, with owners opting to work within the existing structure.
We’re seeing a lift in creativity to save costs, and compromises being made. People are making more cost-sensitive decisions in their fit-out choices for kitchens and bathrooms in particular.
For investors looking at projects involving tradespeople time frames and costs are likely to be more predictable this year.
‘Those undertaking projects will find it less challenging to secure tradespeople’
DEALS ON MATERIALS
One specific trend we’re seeing is homeowners working to get deals on materials for their projects and supplying them themselves. While not all tradespeople are comfortable working on projects with client-supplied materials, there are many that are and there can be respectable savings for those that are willing to invest their time in that way.
While the trades sector is still running at capacity there is the feeling that pipelines are beginning to lighten up. It has been an extremely stressful time over the last couple of years for tradespeople juggling projects around material supply issues, consent delays and the huge spike in demand off the back of unprecedented global events.
Through our insights we’re seeing the balance of demand and supply return to something that more closely resembles “normal”. Material costs aren’t likely to fall anytime soon, and with costs continuing to be passed on there will likely be some further cost increases in future.
For those undertaking projects, incorporating creative approaches for securing materials at a discount can pay off provided you work with a tradesperson who will accommodate this.
For those investors running a strategy that involves hiring tradespeople, time frames and costs are likely to become more predictable in the coming year.