Opportunities and challenges for New Zealand's construction industry in 2023
The New Zealand Ministry of Business, Innovation and Employment (Ministry of Business, Innovation and Employment, MBIE) released its Sector Trends Report in November 2022. It showed that construction contributed NZ$18,100,000,000 to New Zealand's GDP in 2022, accounting for 6% of the national economy.
The New Zealand Ministry of Business, Innovation and Employment (Ministry of Business, Innovation and Employment, MBIE) released its Sector Trends Report in November 2022. It showed that construction contributed NZ$18,100,000,000 to New Zealand's GDP in 2022, accounting for 6% of the national economy.
Figures published in the annual report show that New Zealand's construction industry has reached a new high, with NZ$67,300,000,000 worth of projects awaiting construction. Their total construction value was up 12.4% on the same period last year. Yet this rising total value is accompanied by increasingly smaller new homes and higher construction costs. The report shows that the cost of building a new home rose 18.3% in the year to the end of June, driven primarily by higher building material costs.
Another figure worth watching is the continuing rise in labour costs. In the second quarter of 2022, the average wage for New Zealand construction workers was NZ$33.99 an hour. Construction labour costs rose 4.2%, considerably more than the average increase of 3.4% across other industries.
Against the backdrop of an economic recession, analysing and forecasting New Zealand's construction industry in 2023 is particularly challenging. The industry faces the impact of rising labour and construction costs, alongside pandemic-related delays in building material supplies and construction delays caused by labour shortages. Through objective data and analysis, I hope to help readers prepare more fully for the challenges and opportunities ahead.
It is particularly important to recognise that construction is inherently a very high-risk industry. Over the next year or two, construction businesses need to monitor their financial indicators very closely and work with financial advisers or accountants to review their finances more frequently. The aim is to identify risks early and take timely action to avoid or reduce them.
2023 · Observations
I believe all sound analysis and forecasting should be grounded in observations of the market:
Inflation: Although there have been recent signs of inflation easing, relatively high inflation is likely to remain a defining feature of 2023. Consumer Price Index (CPI) inflation is forecast to fluctuate between 3.5% and 4.5%. Construction inflation has consistently been somewhat higher than average CPI inflation, meaning interest rates and costs will continue trending upwards in 2023.
Interest rates: The Reserve Bank of New Zealand is widely expected to raise the Official Cash Rate (OCR) to 5.5% in 2023, with the precise level depending on the severity of inflation and the recession. This will deal a further blow to the property market, particularly first-home buyers and investors.
Construction costs: Construction costs, mainly materials and labour, will continue to rise. Although the reopening of the border will help address the shortage of skilled workers, wage growth in construction has consistently been the highest of any industry in recent years.
Construction debt and cash flow crisis: MBIE's Sector Trends Report shows that 220 companies registered as construction businesses were liquidated in the year to the end of May 2022, accounting for 19% of all companies liquidated due to insolvency during that period. Reports of construction company failures have continued since the start of 2023, while many material suppliers and subcontractors report serious overdue payments. These are all signs of a challenging next 1–2 years for construction.
Construction workload: The commercial construction market remains strong in 2023, with activity expected to peak in the fourth quarter before gradually slowing. Infrastructure projects are usually government-funded. With government infrastructure spending budgeted at nearly NZ$62,000,000,000 for 2022–2026, the infrastructure construction market should remain stable over the long term. In residential construction, annual new dwelling consents are expected to fall over the longer term from around 50000 to 30000–35000. Even fewer projects may get under way, as some consented projects may be delayed.
The impact of floods and cyclones on the industry: Damage from the floods and cyclones in early 2023 is still being assessed, with preliminary estimates putting it at around 4% of GDP. Reconstruction over the next few years will add more than NZ$1,000,000,000 to the industry's annual workload. Renovation and repair work will increase substantially, significantly cushioning the residential construction market against the sharp decline in new home building.
2023 · Challenges
These observations indicate that the property and construction markets will inevitably face considerable challenges in 2023:
High interest rates driven by high inflation: These will inevitably affect both supply and demand in the property market. Developers will grapple with rising construction and financing costs, while buyers will withdraw from the market or lower their expectations and buy cheaper properties as interest rates rise.
A subdued property market: According to REINZ data for January 2023, Auckland property prices fell 17% over the preceding 12 months. Prices are highly likely to keep falling over the coming months, although some experts believe they may start recovering from late 2023 or even early 2024.
Construction and other costs continue to rise: In January 2023, property analytics group CoreLogic's Cordell Construction Cost Index (CCCI) showed that construction cost inflation had reached 10.4%. This was the first double-digit annual figure since the index was launched 10 years earlier. High costs will remain an issue over the next year or two.
Debt problems and cash flow shortages compound the risks facing construction businesses: Creditworks data shows that overdue debt increased in 2022 to around 30%, compared with a normal level of about 10%. This indicates that builders are struggling to manage their cash flow. Longer construction times are a significant factor. Although construction insolvencies in 2022 were not substantially higher than in previous years, these arrears clearly signal the challenges ahead for the industry.
Political and policy uncertainty: The election year and the direction of post-pandemic immigration policy both bring uncertainty to the market.
2023 · Opportunities
Opportunities always accompany challenges. In 2023, and indeed over the next 2–3 years, the property and construction markets will undergo a reshuffle in which the most adaptable survive. The key is how businesses adjust their strategies and manage risks in time to seize opportunities while maintaining healthy finances and cash flow.
Stay close to your clients: There is no doubt that most of your clients are also going through a difficult period in the current market. Reconnect with them, listen to their views and do your best to help. Avoid pushing too hard, and recognise that while work may not be available now, it will be in the future. This is the time to build trust and strengthen your reputation. Although some larger projects may be postponed, there may be potential work that can begin now. Find a workload better suited to the current market, for example by dividing projects into stages. At the same time, be ready to seize opportunities when the market improves and clients are ready to restart their projects.
The importance of marketing at the bottom of the cycle: Increase market visibility and strengthen communication with clients. For example, use NZIBES, the Chinese Building Industry Association's annual exhibition, to expand your brand's reach and attract more clients.
Review your target market: Reassess what you do best and focus on that area. Are there particular specialisms or types of work you especially enjoy or find more profitable? Identify these areas and tailor your marketing plan to them. Messages aimed at a smaller specialist market are usually more effective than generic messages. Examples include converting a spare bedroom into a home office or building a standalone home office. Or ask yourself whether you have other skills. Could you target commercial fit-outs as well as residential renovations? Given the continued growth in this market, do you have the space, time and money to build and sell tiny homes?
Offer added-value services: Do things that cost little extra but demonstrate value to clients. For example, help them spend their money where it matters most and where it will add the most value to their property.
Be agile with price reductions: Appropriate price cuts that do not undermine the business can help win market share and ease cash flow pressure. Recalculate your costs and look for savings. Ideally, do this early rather than waiting until cash flow is under pressure. If you are unsure where to start, ask yourself: Do you have enough financial expertise to understand the true state of your business, or do you have professional support? Which types of projects are most profitable? Does the business have too many vehicles? Could you sell some and lease instead? Are there inefficiencies in your workflow that could be improved? Could you retender or renegotiate subcontracted work, including stronger penalties for poor performance?
The future · Trends
Finally, I would like to share some current construction industry trends, in the hope that keeping pace with them will help your business develop more steadily and sustainably.
Zero carbon or carbon reduction: More and more government agencies and corporate groups have strong demand for zero-carbon or low-carbon properties. The same trend is evident in housing, with the number of Homestar-rated buildings increasing by 76% between 2020 and 2021. Many institutional investors and funds focus on this area, and government-funded projects, including new builds and retrofits of existing buildings, generally include sustainability requirements. Can you position your business to win contracts in this growing market?
Medium-density development and construction: This remains the mainstay of Auckland's property development and construction market. Greater specialisation by your company and staff in developing and constructing these buildings will help you stand out from the competition.
Small homes and modular construction: Despite the many difficulties in New Zealand, this area remains worth watching. Many businesses and products of this kind are expected to enter the market in the coming years, with their market share growing from 5% to 15%. Can you reposition your business to take advantage of this trend?
Reducing construction waste: For small and medium-sized construction businesses, this is a starting point for contributing to environmental protection.
Digital applications: BIM, smart homes, document processing, project management and the recently popular AI tool ChatGPT can all support the operation and development of property and construction businesses.
Overall, whether your business is stable and performing well or in a worrying position, you should proactively reassess it. Make sure you better understand the risks you face over the next two years and develop a plan to manage them:
Seek professional advice to get help where you need it, or reposition and transform your business to seize new opportunities. In the highly challenging market conditions of the next two years, aim to do more than survive: emerge stronger!