Building construction costs set to accelerate, NZIER says

New Zealand building costs are expected to accelerate at the fastest pace since the last construction boom in the mid-2000s, driven by demand from expansion in Auckland and the rebuilding of earthquake devastated Christchurch,

Non-residential construction cost inflation will average 4.3 percent a year over the next three years, the highest sustained inflation in the sector since the construction boom of the mid-2000s, according to a forecast by the New Zealand Institute of Economic Research for property consultancy Rider Levett Bucknall's fourth quarter report on trends in property and construction. The inflation measure rose 3.3 percent in the year through June.

New Zealand's Reserve Bank is closely watching whether inflation pressures from the Canterbury rebuild seep into broader inflation as it weighs the future path of interest rates. Still, the NZIER says that seven years into an economic recovery, general cost pressures in the economy remain subdued and what inflation there is remains localised in Canterbury, associated with the massive rebuilding programme.

"Construction costs are accelerating, in line with the broader construction sector recovery," the NZIER said "There are significant resource and capacity constraints in Canterbury and increasingly in Auckland - the two regions experiencing strongest growth There are still few signs that Canterbury inflationary pressures are affecting the rest of the economy."

Construction inflation isn't expected to reach the highs of the mid-2000s because a slow Australian economy is likely to see some labour staying in or returning to New Zealand, the NZIER said.

Non-residential construction building costs rose an average 8.7 percent in 2004, according to capital goods price index data from Statistics NZ. That lift was driven by an uptick in new work at the same time as a pick up in the economy, the NZIER said.

(BusinessDesk)