The construction industry continues to grow slowly

The construction industry has experienced slow growth over the past 18 months due to tax changes, high levels of inventory on the market and credit-constrained buyers.

CoreLogic’s latest Cordell Construction Cost Index (CCCI) recorded a 1.1 percent increase in the September quarter (Q3), reversing a decline in the second quarter.

The CCCI report measures the rate of change in construction costs in the housing market for a typical, “standard,” three-bedroom, two-bathroom, single-story brick and tile home.

Kelvin Davidson, chief real estate economist at CoreLogic, said it was the first time since December 2022 that quarterly growth had exceeded 1 percent, with an annual growth rate of 1.3 percent, well below the long-term average growth rate of 4.3 percent lies.

“The industry has emerged from the extreme highs seen during Covid and construction activity remains solid compared to previous cycles,” Davidson said.

“Nevertheless, it looks like there are capacity openings that have eased cost pressures.”

The third quarter saw a decline in subcontractor compensation rates and many plumbing materials such as PVC pipe, but the cost of materials such as window hardware and kitchen joinery increased over the period.

“With such a high inventory of existing listings, there is less incentive for buyers to consider new construction properties,” Davidson said.

“The shortening of the Brightline test and the reintroduction of mortgage interest deductibility for all properties regardless of age have also reduced the attractiveness of new construction.”

CoreLogic data showed that about 26,000 properties were currently listed for sale, compared to 23,000 at the same time last year and double the 13,000 available in 2021.

Davidson said actual construction workloads, as measured by work performed, are down about 15 percent from their peak.

The supply situation had also slowed, with annual residential permits peaking at about 51,000 in May 2022 before falling 34 percent to 33,632 in August this year.

But Davidson said the Reserve Bank’s newly introduced debt-to-income ratio restrictions – which exempted new builds – could help boost demand in the segment.

“While the outlook for the sector is not particularly bright in the near term, signs of life may just be beginning to appear, and further interest rate cuts and improvements in the labor market are also expected to have a positive impact on construction activity.” 2025.

“Developers may feel more confident about increasing supply if these changes, combined with falling mortgage rates, lead to a relative shift in demand towards new construction over the next 12 to 18 months.”

He said the industry is watching closely for signs of a turnaround in 2025.

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