New Zealand’s construction sector has been struggling to keep up with demand in the face of capacity constraints. While there is plenty of work taking place, profitability has been getting squeezed as a result of cost pressures and delays. A BDO survey found many construction firms and sub-contractors are operating on unsustainable margins.
As a result of these pressures a growing number of companies have been forced into receivership or posted material losses. Perhaps the most noteworthy example is Fletcher Building which has lost almost $NZ1 billion over the past two years on large construction projects and posted a loss of $NZ190 million in 2017-18 – its first annual loss since the GFC.
This is not to say Australia is inevitably heading down a similar path. There are several important differences across the two countries.
Capacity utilisation began to accelerate in New Zealand much earlier, prompted by the 2011 Canterbury earthquakes, meaning spare capacity has been lower for longer than in Australia. Australia’s construction capacity was ramped up during the mining boom.
It’s likely the interstate migration of workers away from the mining sector in Queensland and Western Australia toward the housing and infrastructure sectors in Sydney and Melbourne has helped relieve pressure on labour availability. Labour availability has been a significant constraint in New Zealand.
This is reflected in wages growth which in New Zealand has seen construction wages rising faster than the all industry average for almost every period since 2011. In Australia construction wages have been below the all industry average since 2014.
In New Zealand, housing construction costs have been rising at 5.3 per cent year on year for the past five years, significantly above average inflation of just 1.1 per cent. Australian housing construction costs have also been running ahead of inflation, but the difference over the last five years (2.6 per cent vs 1.9 per cent) is much smaller.
At the national level we are not seeing much evidence of cost pressures in Australia. But the details across New South Wales and Victoria, as well as anecdotes from ANZ clients, confirm this story is worth keeping a close eye on.
Daniel Gradwell is a Senior Economist at ANZ