Residential building rebound tipped to continue

A rebound in home building consents is expected to continue in coming years, but in a new report industry analyst BIS Shrapnel says the cycle will peak at a lower level of activity compared to the last peak in 2004.

The rebound would be driven by a shortfall in new house supply, with BIS Shrapnel estimating dwelling completions to fall to between 17,300 and 18,600 a year over the two years to 2010/11.

"This in no way meets our estimated underlying demand for housing, which will average 29,000 units per annum over the same period," report author Adeline Wong said.

But building activity would be constrained by worsening home affordability due to rising mortgage rates and house prices.

House prices were expected to continue upward due to the tightening new housing supply in the short term, while housing demand was expected to increase amid strengthening economic growth.

The North Island, led by Auckland, was expected to lead the rebound in residential building activity over the next three years, as building consents in the Auckland region rebounded from rock bottom.

"We believe the housing stock deficiency in the Auckland region will continue to build up, due to its protracted downturn over the past seven years which has seen building consents languishing at near record low levels," Ms Wong said.

Overall non-residential building consents were expected to soften in 2010/11 as office and sports stadium building activity dropped off.

But the downturn was expected to be moderate as it would be driven by weak demand, rather than excess supply, and a lack of financing for developers following the credit squeeze during the global financial crisis.

"The recent recession and continued weak economic conditions has resulted in weak demand for commercial properties," Ms Wong said.

"This has caused rental rates to soften and is exerting upward pressure on vacancy rates. This is expected to get worst before it gets better, in view of new supply coming into the market over the next couple of years in particular."

Lack of funding had stopped or delayed most new projects during the past 12 months, resulting in a reduction in new supply for the next two to three years.

"This means once demand picks up again current excess space will be quickly absorbed, vacancy rates will tighten and rents will rise -- setting the stage for the next upswing in new construction. Strengthening leasing markets will then bring back the equity injection that will underpin the next round of commercial projects starting from calendar year 2014," Ms Wong said.

Infrastructure construction over the next five years would be underscored by $5.8 billion of extra infrastructure spending and the Government's priority land transport investment in order to increase economic productivity and growth in New Zealand.

Figures from Statistics New Zealand show the number of consents for new dwellings, excluding apartments, rose 27 percent in the December quarter from a year earlier, to 4039.

Ms Wong said that despite forecast mortgage rate rises during the next two to three years, BIS Shrapnel expected the confidence of home buyers would be boosted by wages and employment growth.

Relatively high net migration levels would also support the housing market in the next three years, with the firm projecting average net migration to be 15,000 people a year.

That was down from the high levels of the past year or so, expected to reach 26,000 people by the end of March 2010, but still quite high by historical standards.

Meanwhile the Builderscrack.co.nz tradesman job size index, also published today, indicated that the average size of jobs completed by tradespeople fell for the second month in January, as fewer larger jobs were completed, and competition remained strong for smaller jobs keeping prices competitive.

After showing tentative signs of recovery in November last year, over December and January the index retreated back to levels seen in July last year. Household confidence remains fragile when it comes to home renovation and improvements.

The index is based on the cost of trade jobs completed through Builderscrack.co.nz.

"While the volume of jobs completed sky rocketed as the weather improved in January, the value of the jobs declined. An increasing number of larger jobs were cancelled, with customers citing that their circumstances had changed," Builderscrack.co.nz director Keith Roberts said.

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