Has inflation all but disappeared? New Zealand construction costs stabilise: a comprehensive housing market outlook for 2025

Construction costs gradually stabilise

After four years of sharp fluctuations, residential and commercial construction costs in New Zealand are gradually stabilising. The latest QV CostBuilder report shows that residential construction costs rose by just 1.5% over the 12 months to the end of November 2024, the lowest annual increase since records began in 2015.

 

1. From sharp fluctuations to stability

This change is undoubtedly encouraging. The report notes that annual construction cost increases in New Zealand reached 18.9%, 11.3% and 5.6% between 2021 and 2023. In 2024, however, growth quickly fell to 1.5%, indicating a significant easing of cost pressures. Looking at quarterly figures, residential construction costs rose by just 0.6% in the three months to November 2024, following increases of 0.3% in each of the preceding two quarters. QV CostBuilder quantity surveyor Martin Bisset commented: “After four years of significant fluctuations, construction costs were more stable in 2024. This reflects the continued easing of inflationary pressures both domestically and internationally.”

2. Commercial construction costs grow more slowly

Cost growth for non-residential buildings, excluding educational buildings, was more moderate than for residential construction. Over the 12 months to the end of November 2024, commercial construction costs per square metre rose by just 1.4%. Despite the overall slowdown, Bisset cautioned: “These figures are averages. Actual construction costs still depend on the standard of fit-out, internal layout and other details.”

3. Opportunities and challenges in a period of stability

Stable construction costs have undoubtedly boosted confidence across the industry, but they also raise new questions for the market. Slower cost growth can help improve builders’ profitability and give homebuyers and developers greater control over their budgets. At the same time, slowing construction activity and market uncertainty may lead to a more cautious approach to future investment and development.

 

This raises a question: do stable construction costs mean the industry has fully emerged from its period of turbulence? The answer remains unclear.

Although inflationary pressures have eased, other external variables, such as the labour market, supply chain issues and the wider economic environment, could still affect future cost trends. For residential and commercial developers, the current market offers a relatively stable window, but it also calls for more detailed cost management and project planning. As Bisset concluded: “Construction costs may be stable, but they will always be influenced by multiple factors. Understanding the details and responding flexibly remain the keys to success for industry participants.”

There is no denying that New Zealand’s housing market is reaching a turning point marked by conflicting forces and opportunities. As inflationary pressures ease and interest rates fall, many hope 2025 will bring steady growth. However, economic weakness and policy changes continue to cast a shadow over the market. CoreLogic chief economist Kelvin Davidson and ASB senior economist Mark Smith offer valuable insights into the complex market conditions ahead in 2025.

 

Market trends and challenges: Kelvin Davidson’s view

 

Competing forces in 1.2025

Kelvin Davidson describes 2025 as a year of “competing forces”. He believes that although falling interest rates will support house sales and price growth, the market will also face a range of constraints. Housing affordability remains a serious concern, ample listings are proving difficult to absorb quickly, and rising unemployment and debt-to-income (DTI) restrictions could become more significant in 2025. He forecasts house price growth of between 5% and 7% in 2025, describing this as “moderate growth”. This is good news for homeowners, but it is relatively modest compared with the strong rebounds seen in the early stages of previous market recoveries.

2. Economic weakness puts pressure on the market

Davidson also notes that weakness across New Zealand’s economy will continue to weigh on the housing market. He points to recent economic data showing weak consumer spending and an ongoing contraction in manufacturing activity. These factors could push the economy into a technical recession at the end of 2024, continuing into early 2025. Davidson says: “The economic downturn will directly affect homebuyer confidence and could limit further house price growth.”

3. A dual challenge for investors

For property investors, Davidson presents a “contradictory outlook”. Although lower interest rates will improve cash flow from rental investments, DTI restrictions and greater difficulty obtaining finance could create more barriers for investors buying property.

 

The influence of wider economic factors: Mark Smith’s view

 

1. The potential and limits of falling interest rates

Mark Smith focuses more on the boost that falling interest rates could give the housing market and the wider economy. He forecasts that the official cash rate (OCR) will fall to 3.25% in 2025，household borrowing rates could fall to between 5% and 6%. This would give homebuyers and developers greater financial flexibility and ease cost-of-living pressures. Smith expects house prices to rise by 5%–10% in 2025, stimulating more economic activity in retail and construction. However, he also notes that although lower interest rates will stimulate the market, rising unemployment and insufficient consumer spending will continue to hinder its recovery. Smith says: “The market may perform better in 2025 than in 2024, but a full recovery will take more time.”

2. The impact of slowing inflation on the housing market

Smith is optimistic about inflation stabilising in 2025, expecting it to remain around 2.6% throughout the year. This would provide businesses and households with a more predictable economic environment, helping the economy grow. He says: “As inflationary pressures ease, households will have more room in their budgets. This will support homebuying and help spending recover in the retail and services sectors.”

3. Uncertainty from external factors

Smith also discusses the potential impact of Trump’s re-election as US president on New Zealand’s economy. As New Zealand’s third-largest trading partner, the United States’ trade policies will have a significant impact on exporters. He warns that new tariffs imposed by Trump could trigger global economic instability and indirectly affect New Zealand’s housing market.

 

Opportunities and risks in 2025

New Zealand’s housing market will face conflicting forces in 2025. Kelvin Davidson highlights the potential risks of economic weakness, rising unemployment and policy restrictions, while Mark Smith remains optimistic about the prospects offered by falling interest rates and easing inflation. Overall, moderate house price growth will offer opportunities for homeowners and investors, but market uncertainty also calls for greater caution from homebuyers and developers. Finding a balance between these competing forces will be a key task for all market participants in the year ahead.