Are skyrocketing construction costs here to stay?

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Clients old and new have been asking us what’s up with skyrocketing construction costs and where we think things will head – up, down or stay much the same. Like you, we don’t have a crystal ball so we can’t see with any certainty where things will go. So, we asked Jeremy Blake, Associate Director – Quantity Surveying at Hampton Jones for his expert opinion. Here’s what he had to say.

Over the past two years, there have been significant cost increases in the construction industry, across all construction sectors.

In April 2023, (RLB Forecast Report 104 – NZ Trends in Property and Construction, prepared by the New Zealand Institute of Economic Research) it was reported that “Cost pressures in the building sector remain intense despite the easing in construction demand. A net 86 per cent of building sector firms reported higher costs in the March quarter. However, only 46 per cent of building sector firms increased prices, indicating the continued pressure on operating margins in the sector. With signs of capacity pressures easing in the construction

sector, we expect this will drive a moderation in construction cost escalation from current high levels over the coming years.”

After talking with Jeremy, I think the bottom line is that the cost to construct is now up at record highs. With annual CPI inflation rates up around 6.0% (12 months to June 2023) and construction inflation rates for a new house for the last 3 years even higher (15.7% in 2021; 14.1% in 2022 and 7.8% for the first six months of 2023) – a 37% increase since 2021 – construction costs are unquestionably significantly higher than they have been historically. 

Jeremy says, “Information sources viewed in isolation need to be considered with caution, however taking a holistic view, the NZ economy, Covid, transport, labour and material resources, population growth etc, have all played a part in contributing to inflation in the NZ economy, and in particular the construction sector. Fortunately, this rate of inflation cannot be sustained indefinitely, and the consensus is that the rate of cost increase is starting to reduce”.

The good news is that construction inflation is expected to plateau and may even drop a bit, but certainly not to pre-pandemic levels. This isn’t particularly happy news for those of us pricing up new projects right now, but it is the reality all of us in the construction business – clients and contractors – are having to face. Jeremy’s opinion was that “the biggest contributor to cost increases was time, with the biggest enemy right now, the time taken to bring a project to fruition”. 

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