Interest rate cuts no ‘miracle’ cure for building industry

Falling interest rates will help bolster the struggling residential construction sector, but they are no “miracle” cure for an industry facing strong headwinds, economists say.
The Reserve Bank this week cut the benchmark interest rate by half a percentage point to 4.75 percent, stepping up the pace from its quarter point cut in August. Many economists expect the bank to cut a further half point next month to bolster the weak economy.
That’s good news for construction, which is highly sensitive to interest rate movements. However economists remain cautious about the outlook for the sector as it faces a lacklustre housing market, rising unemployment, high costs and weakening migration.
“We are cautiously optimistic, but not hoping for a miracle anytime soon. There’s a little bit of water to go under the bridge yet,” said BNZ Head of Research Stephen Toplis.
“What you can say definitively is that construction will be better than it would otherwise have been, because interest rates are falling – you can’t definitively say it will be ‘good’, because there’s still a whole pile of other factors that it is having to face into now.
“There’s a number of quite strong headwinds there.”
Toplis noted the cost of construction remained very high, particularly relative to buying an existing house.
“It may take some equilibration of that before people start to borrow to build new,” he said.
Construction costs have soared about 40 percent since Covid and while the increase has flattened off over recent months, costs remain elevated.
And the latest housing market data showed there was still plenty of competition from existing homes, with sales volumes falling and the number of properties listed increasing.
Real Estate Institute of NZ data for August showed sales volume slipped 0.7 percent from August last year, while the volume of housing inventory for sale was up 30 percent
Toplis noted net migration has also slowed, dampening the demand for housing.
Stats NZ will publish the latest migration figures for August on Friday, which are expected to show a continued trend of fewer arrivals and higher departures.
In July, annual net migration of 67,200 was about half the peak of 136,700 in October last year. Economists say there’s a risk migration could turn negative next year, with more people leaving than arriving.
A downturn in the employment market also impacted demand for new housing.
Toplis noted unemployment was expected to continue rising, as it usually peaked 12 to 18 months following the peak in interest rates, and that wouldn’t encourage home building.
“While rising interest rates hurt if you’re a mortgage holder, it doesn’t hurt anywhere near as much as losing your job does,” he said.
CoreLogic chief economist Kelvin Davidson said construction had been pretty weak lately with consents for new homes falling for two years in an environment of higher interest rates and much existing housing stock for sale.
“Interest rates have been high,” Davidson said. “It’s expensive for builders to fund these projects, and it’s expensive for householders to commit to a new build, so demand has been a bit soft. People haven’t been confident enough to bring forward new projects and the whole sector’s been slowing down.”
Still, he feels the market may be starting to turn around amid signs residential building consents, a forward indicator of activity, might have found a floor of about 34,000 a year over the past few months, down from a peak of 51,000 in mid-2022.
“Confidence might be turning around. You look at the hard numbers, and they’re not turning around dramatically, but at least a floor for dwelling consents would be the first step,” he said.
Davidson noted construction was a “boom and bust” industry that was either “all on or nothing on” but said the signs were looking more positive for next year.
“When you think about interest rates coming down, confidence returning a little bit, and anecdotally people feeling a bit more optimistic on the ground, you start to tell a slightly more positive story,” he said.
“There’s a sense that people have been through the downturn, and they maybe now are just starting to see some signs that we are close to the bottom, and maybe starting to think about a bit more activity in 2025.”