Residential construction cost growth reaccelerates as building activity lifts

New Zealand residential construction costs recorded a further lift in the March quarter, with annual growth accelerating as signs of a recovery in the country’s building activity boost industry momentum.

The latest Cordell Construction Cost Index (CCCI) shows residential building costs increased by 1.0% in the three months to March. The quarterly result was slightly above the 0.9% rise in the three months to December and remains in line with the long-term average.

More notably, the annual pace of growth accelerated to 3.0% from 2.3% in the December quarter, marking the fastest increase in two-and-a-half years, albeit below the long-term average of 4%.

Cotality NZ Chief Property Economist Kelvin Davidson said the shift in the annual growth rate was a key signal the sector is moving into a more active phase.

“The quarterly figures have been relatively steady, but we’ve recorded a couple of modest increases and the acceleration in the annual rate shows cost growth is starting to find some upwards momentum again,” Mr Davidson said.

“That increase reflects a gradual pickup in activity, with more projects progressing, which has placed renewed pressure on parts of the construction cost base.”

He said the latest figures suggest the period of easing cost growth seen through much of 2024 and 2025 has shifted and is moving back into a growth phrase.

“We’re still well below the extremes experienced during the post-COVID period, but two consecutive quarters of growth indicates change is occurring and costs are edging higher again as the sector recovers.”

Dwelling approvals on the rise

Recent data on dwelling consents reinforces the improving outlook for construction activity, with the annual number of new dwellings approved increasing to a two-year high of around 37,000.

Mr Davidson said the rebound from the mid-2025 trough adds to the early signs of recovery seen late last year.

“We’ve moved beyond that period of flat or declining approvals, and the recent rise in consents would suggest there’s a more sustained recovery taking shape,” he said.

“Lower mortgage rates will have improved feasibility for some projects, while policy settings continue to support new builds relative to existing housing.”

He added that consents weren’t a guarantee of completed projects, but remain a forward-looking indicator of activity, with the full impact on costs unknown.

“There’s typically a lag before those approvals translate into work on site, but the momentum is moving in an upwards direction with builders becoming busier again, and that tends to coincide with an increase in cost pressures.”

Increases were recorded across a range of materials and finishes, including a 12% lift in the cost of masonry, 5% for wallpaper, 4% for LED lighting and declines in plumbing-related products such as PVC piping and bathroom fitouts.

“We’re not seeing widespread cost surges, but enough inputs are rising to push overall costs higher. That’s consistent with a market where demand is returning and capacity is starting to tighten again at the margins,” he said.

Cost pressures to challenge construction recovery

While the construction sector is expected to continue its recovery through 2026, supported by improving demand and a stronger pipeline of approved projects, Mr Davidson said the outlook is sensitive to both domestic and global factors.

He said a lift in migration and housing demand would likely support further building activity, with the potential for construction costs to trend higher.

“More activity in the construction sector is ultimately a good thing, but even relatively modest increases can impact borrowing requirements or project feasibility, particularly at a time of broader cost-of-living pressures,” he said.

Mr Davidson noted that build costs haven’t fallen in any meaningful way, meaning many households considering a new build or renovation are still working from a high starting point as conditions begin to firm up again.

He said global uncertainty, including the US-Israel-Iran conflict and higher fuel prices, is already beginning to filter into the supply chain, with some suppliers signalling potential price increases.

“Domestic conditions are improving, but global factors will also play a role. The US-Israel-Iran conflict and higher fuel prices are unknowns that could have an impact, particularly if they flow through to freight and material costs,” he said.

Mr Davidson said these dynamics align with what the Reserve Bank has described as first-round, indirect inflation effects, and will be closely monitored for any broader flow-on impacts.

“For the construction industry itself, this will be a challenging period as firms adjust to higher fuel prices just as activity is starting to recover,” he said.