Building Costs Hit 3-Year High of 4.8% While One-Year Rates Surge

Kelvin Davidson (00:00):
Pricing was looking pretty attractive, but with the rise in wholesale rates globally, that will be influencing those three-year rates more. So, they have pushed up. There has been that noticeable shift back towards that one-year fix, and you do wonder if it is a pricing thing, with banks staying reasonably competitive at their one-year rate.

Nick Goodall (00:01):
Kia ora, and welcome to the New Zealand Property Market Podcast, brought to you by Cotality for the 12th of October 2026. I'm Head of Research, Nick Goodall, and today I'm joined, as per usual, by our Chief Economist Kelvin Davidson. Kelvin, welcome back, mate. I hope you had a great week off last week, and we can catch up on your holiday a little bit later. But first, before you went on leave, you wrote the Q3 Cordell Construction Cost Index (CCCI) report, which went out to the media last week. Can you take us through the headline figures from that write-up?

Kelvin Davidson (00:33):
Yes, certainly. We saw a 4.8% annual growth rate in residential construction costs. This is based on a standard build recipe, as the Cordell data team calls it, which tracks a typical three-bedroom, two-bathroom standalone house. This is a standalone build, not a townhouse.

Now, a 4.8% annual increase is the fastest rate of growth we have seen in three years, since the middle of 2023 when the index recorded 6.4% growth in the second quarter of that year. While we are still well below the post-pandemic peak where annual cost growth surged above 10%, a 4.8% rate sits above the long-run average of approximately 4.0% per annum on this series, which goes back to 2012.

What this tells us is that the supply chain surcharges, fuel costs, and global shipping disruptions stemming from the Middle East conflict are now flowing directly through into construction materials. For a while, builders were choosing to absorb these cost increases under competitive pressure and existing fixed-price contracts. However, our latest data suggests that those margins are exhausted, and builders are beginning to pass these costs directly through to the final selling prices of new developments.

When you look at individual material lines, heavy products that require substantial shipping and trucking—such as reinforcing steel, structural steel, and roofing tiles—are seeing significant cost increases. We are also seeing a strong price rise in plumbing and plastics, where elevated global oil prices directly impact PVC piping and sealants.

Passing these costs on is going to be incredibly challenging for developers because existing house prices remain flat-to-falling. If a new build becomes increasingly expensive while existing housing stock is flat and listing choice is abundant, buyers will substitute new builds in favour of existing homes. This shift in buyer demand could cause the recent upswing we have seen in annual dwelling consents (which are back above 40,000) to tail off heading into 2027. It is not an ideal time for construction cost growth to accelerate, particularly as mortgage rates remain elevated.

Nick Goodall (05:01):
Yeah, I think that is a critical point. The relationship between busy consenting pipelines and rising costs suggests that because annual consents are holding above 40,000, there is reduced spare capacity in the construction sector. Builders feel busy enough to pass these cost increases on, rather than having to scrap for every piece of work. But as these costs rise, it will inevitably discourage some prospective buyers from building new.

It is also worth noting that we are now more than seven months into the closure of the Strait of Hormuz and the Middle East conflict. Nobody expected these shipping bottlenecks to persist this long, and they are acting as a prolonged drag on broader economic activity.

Additionally, the 4.8% annual construction cost growth sits well above the general CPI inflation rate of 4.1%. Since construction is a component of domestic non-tradable inflation, this acceleration will apply upward pressure to the upcoming Q3 CPI release, increasing the probability that the Reserve Bank of New Zealand will deliver another OCR hike. We will get more insights on that through the selected price indexes out this week.

Moving to credit, we received new RBNZ lending data tracking the fixed-term periods that borrowers are choosing. What stood out to you in that dataset, Kelvin?

Kelvin Davidson (08:39):
That was a notable shift. If you look back two or three months, about 20% of new mortgage lending was placed on a one-year fixed term. In the latest figures, that has jumped significantly to 30% of all new lending, putting it on par with the popularity of two-year fixed terms.

This pivot to shorter terms has come entirely at the expense of three-year fixed terms, which had previously been popular. This is primarily a pricing story. Rising global wholesale swap rates have pushed three-year fixed rates up, making them look expensive. In contrast, banks have remained highly competitive on their one-year terms, with one-year specials dropping below 5.0% (such as 4.99%), whereas two-year rates are sitting around 5.29% to 5.39%.

Borrowers are choosing to take the cheaper one-year term to retain flexibility. If mortgage rates begin to ease next year, they can cash in on those lower rates earlier, rather than locking in expensive multi-year debt. It is a sensible strategy, particularly as most forecasters expect that while we might see one or two more OCR increases towards a projected peak of 3.25% to 3.50%, we are unlikely to see an aggressive spike in retail interest rates. For most borrowers, spreading the risk across a mix of one-year and two-year terms remains the most effective advice.

Nick Goodall (13:46):
Agreed. If the OCR peaks around 3.25% next year, a retail one-year mortgage rate sitting around 5.25% represents a highly manageable scenario for most households. Taking a one-year term provides that flexibility, especially when the margin to a two-year rate is around 30 to 40 basis points.

This week, we also have your pulse article coming out, which provides detail on our 10-year average annual growth rate dataset, recontextualising capital growth across every territorial authority.

How was your holiday in Hanmer Springs, Kelvin?

Kelvin Davidson (16:39):
It was fantastic. The weather was beautiful, around 21 to 22 degrees every day. We spent plenty of time in the family pools, explored the forest, and took a drive up into Molesworth Station. Taking half of the school holidays off made the family routine incredibly smooth. It was a great switch-off, but I am glad to be back at the desk.

Nick Goodall (19:46):
Excellent, mate. I travelled up to Auckland for the Bledisloe Cup on Saturday. I visited the All Blacks Experience near Sky City, and they actually had the physical Bledisloe Cup on display. I got a photo holding it, which was a major highlight for me.

The Test match itself was brilliant, with the All Blacks playing in full flow. They addressed the issues they had against the Springboks, particularly around receiving and executing kicks. Additionally, the Taniwha won their first home quarter-final on Friday, setting up an NPC semi-final against Otago in Whangārei this weekend. If we win and Canterbury wins, the final will be in Christchurch, and I am already looking at flights.

I also caught the Bathurst 1000 over the weekend. It was dramatic to see the leading Ford Mustang run out of fuel on the final lap, allowing the second-place car to take the win.

It is good to have you back, Kelvin. Thanks to everyone for listening, and please get in touch with any questions or feedback. My name is Nick, he's Kelvin. You've been listening to the New Zealand Property Market Podcast. Mā te wā.

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