Market Overview – Challenges

Over the past year, the construction and property sector has navigated a period of sustained difficulty, shaped by the broader economic turbulence that has defined the last two years. Persistent inflationary pressures, elevated interest rates, and the specter of a potential recession combined to suppress market activity and erode some confidence across the industry.

The development pipeline was notably impacted. Numerous large-scale residential projects were deferred or abandoned altogether, as developers re-evaluated feasibility amid escalating costs and reduced profit margins. Political change further influenced the outlook. The incoming government acted quickly to cancel several significant infrastructure initiatives, including projects Construction Cost Consultants have been working on like iReX and TREC. Many other large-scale residential and commercial projects have also been affected, creating further disruption and reducing forward workload opportunities across the sector.

Architecture and design practices were impacted, with many firms cutting staff or reducing working hours in response to a slowdown in new commissions. Contractors faced similarly tough conditions, with an increasingly competitive market environment driving a rise in insolvency risk.

Throughout the industry, a cautious and defensive mindset took hold, best captured by the motto: "Survive ‘til ’25." It reflects the pragmatic approach adopted by many businesses as they sought to weather what has been a testing period.

Residential Sector Under Continued Pressure

Residential construction volumes in New Zealand have continued to fall sharply, underscoring the broader challenges facing the sector. Seasonally adjusted data shows that the volume of residential building work done has dropped significantly from the post-COVID peaks, with the current trendline diverging meaningfully from prior projections.

Residential construction fell from a high of over NZ$6 billion to below NZ$5 billion, marking one of the steepest declines in over a decade. The downturn reflects the combined effects of inflation, high interest rates, reduced housing affordability, and weakened developer confidence.

Supporting this trend, recent figures show that the annual value of building work consented has declined by $5.6 billion over the past two years. This represents a drop of over 15,000 new dwellings annually, further confirming the contraction in pipeline activity. The pullback is especially evident in high-density residential developments, where feasibility has been most heavily impacted by rising construction and finance costs.

The market continues to grapple with a mismatch between housing need and delivery. While population growth and urbanisation remain long-term drivers, near-term output is likely to remain subdued. Developers are taking a cautious approach, awaiting clearer signals of market stabilisation before committing to new projects.

With no immediate relief in sight from monetary policy or cost pressures, the residential sector is expected to remain in a cyclical trough through the remainder of 2025.

Elsewhere, the Retail sector witnessed similar issues, with just 35 consents issued for new retail premises in Q4 2024, down from 46 (-24%) in Q4 2023. Similar reports came out of the Commercial sector, with consents for new office buildings sinking to a 32 year low in Q3 2024, and new factory consents at a record low.

Market Outlook – Signs of Stabilisation Emerging

Amid ongoing sectoral pressures, several key indicators point to a gradually improving outlook for the construction and property market.

Inflation has eased significantly and is now expected to stabilise around 2%, providing a more predictable economic environment. This is encouraging for both developers and financiers, as cost certainty begins to return to project feasibility assessments. We’ve also started to hear this confidence in our recent conversations with developers.

In tandem, interest rates are trending downward following a prolonged tightening cycle. Rates are expected to stabilise within the 3% to 4% range over the coming year. This shift will ease pressure on borrowing costs for households and businesses alike, with the potential to re-activate previously shelved developments and improve affordability in both the residential and commercial sectors.

Importantly, construction cost escalation has levelled off. The average building cost per square metre increased by just 0.1% this quarter, marking a significant slowdown in inflationary pressures across the industry. Annualised building cost inflation now sits at just 1.2% for residential and 1.7% for non-residential developments — a stark contrast to the volatility experienced over the past two years.

On average, the Elements increased 0.1% since the last update. The range of change is 0.0% to 0.4%, with the top 5 increases, as below:

• Site Preparation: up 0.4%, due to an increase in diesel rates.
• Substructure: up 0.4%, also due to an increase in diesel rates.
• Partitions: up 0.4%, due to an increase in plasterboard and insulation rates.
• Wall Finishes: up 0.3%, also due to an increase in plasterboard and insulation rates.
• Exterior Works: up 0.2%, also due to an increase in diesel rates.

On average, the Trades increased 0.1%, since the last update. The range of change is -0.3% to 1.8%, as below:

• Plumbing: down 0.3%, due to a decrease in some vanity and sink rates.
• Demolition: up 0.3%, due to an increase in diesel rates.
• Partitions: up 0.5%, due to an increase in plasterboard and insulation rates.
• Excavation: up 1.4%, also due to an increase in diesel rates.
• Plasterboard Linings: up 1.8%, also due to an increase in plasterboard and insulation rates.

This stabilisation in costs is a key factor supporting a more optimistic medium-term view. As financial conditions improve and pricing pressures abate, market participants may find renewed confidence to revisit projects and plan for new investment opportunities in the second half of 2025.

Green Shoots – Early Signs of Recovery

While the past year has been marked by widespread challenges, there are now tangible signs that momentum may be starting to return to the construction and property sector.

We are seeing larger projects that were previously paused or shelved are beginning to re-emerge, with many returning to the design phase, an early signal of renewed developer confidence. In parallel, lenders are reporting an uptick in funding applications, suggesting that project sponsors are once again exploring viable opportunities as economic conditions stabilise.

From a transactional perspective, real estate agents are also seeing a noticeable lift in market activity. Buyer interest is increasing, and sentiment appears to be shifting in a more positive direction after a period of subdued engagement.

The public sector is also playing a vital role in supporting this nascent recovery. New rounds of government-led tenders are entering the market, and recent announcements — including the five-year Infrastructure Plan and the identification of 149 priority projects through the Fast-Track Approvals Bill are providing the industry with much-needed clarity and forward visibility.

While challenges remain, there is a growing sense that the worst may be behind us. Optimism has begun to return, with many across the sector hopeful for a more active and stabilised market by the second half of 2025.

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