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Tony Alexander BNZ Economist Weekly Overview 5 May 2016

Tony Alexander BNZ Economist Weekly Overview 5 May 2016

Construction and Investment
While household spending usually accounts for 70% or so of spending in the economy construction on
average accounts for another 12%. This includes house building, commercial construction, and civil
engineering. During calendar 2015 construction was almost right on its long term average contribution, but
this was well up from just 10% in 2007 which was the lowest reading in almost two decades, courtesy of the

The most recent indicators show construction is still growing, though widespread anecdotes tell us that the
staff with necessary skills are not there to allow the sector to grow as rapidly as customers want in the next
few years. In the year to March the number of consents issued for the construction of dwellings rose by 12%
led by Auckland with a rise of 22%. Stripping out that rise and a 14% fall in Canterbury leaves a 21% rise for
the rest of New Zealand.
The house building sector is growing strongly supported by firm population growth, catch-up building
following the lean post-GFC years, low interest rates, and investor demand. At this stage it is not possible to
give a reliable indication as to when the construction peak will occur, and that applies to the commercial
sector as well.
The value of non-residential construction consents rose by 11% in the year to March and at $5.8bn was well
up from $3.9bn three years ago. With tourism booming there will be a substantial offset to weakness in dairy
sector construction (gross overinvestment in cows anyway). As for the other area of construction, civil
engineering/infrastructure substantial expenditure is underway and planned in Auckland in particular and
local authorities as ever have a lot of work to catch up on.
The ANZ’s monthly survey shows that over the three months to April on average a net 29% of builders said
they expect higher levels of residential construction in the next three months. This is just above the average
of a net 26% so bespeaks of strong activity but not a boom, probably because falling construction in
Canterbury is offsetting to some degree the growth in the rest of the country.
A net 26% of builders expect higher levels of commercial construction which is well above the average of a
net 16% and indicative of a slight resource shift in the construction sector from residential toward nonresidential.

It adds up to construction having capacity to expand a lot more from current levels, but in fact lacking the
resource capacity to do so and that will have cost and quality implications.

Alongside the long-term nature of construction activity benefits is business investment in plant, machinery
and equipment. As repeatedly noted over the years, in New Zealand we lack good up to date indicators of
what is happening with business investment so we end up relying upon confidence surveys. The national
accounts data show that investment in PME rose by 4% during calendar 2015 after rising 7% in 2014 and
4% in 2013. The trend is upward but the path on a quarterly basis is so erratic that even if we had up to date
short-term measures we would probably ignore them.
In the ANZ survey a net 12% of businesses on average recently have been saying they plan higher PME
spending which equals the average reading. So there is business investment growth in this area which is
good, but it is not a special driver of economic growth currently – which just goes to reinforce the point we
economists and many businesspeople outside lobby groups have long made. Interest rates (currently at
record lows) are not the key determinant of business investment.

Personally I have just one question regarding the housing market. When will the Reserve Bank act? While I
find the timing of Auckland’s resurgence to be earlier than expected, it is not surprising that it has done so
given the worsening shortage as supply growth fails abysmally to keep up with population growth. The
ongoing strength in the regions is also not surprising as this has happened in previous cycles and was well
overdue for getting going this time around. It is surprising it has taken so long – but that just means there are
more catch-up price gains to be registered around the country, especially as sustained low interest rates are
factored into calculations of affordability and yield.
The housing market is on a roll again and with the pace of housing debt growth hitting its highest rate since
early-2008 at 8% the Reserve Bank will be getting increasingly concerned about risks to the financial sector
stemming from the risk (a low one) that some weird shock causes a decent 20% plus pullback in house
For the record, this week Barfoot and Thompson data showed that sales are slowly improving though in April
were 12% down from a year earlier, with some of that decline likely due to a shortage of listings. Stock at
month’s end was down by 10% from April 2015 and the number of new listings received during the month
was 5% lower than a year ago. The average sales price edged up slightly from March to $873,000 which
was 8.6% ahead of a year earlier. In the past three months prices have risen 0.2% after rising 2.4% in the
three months to January and 0.9% in the three months to October. So price action is mildly positive. We
await REINZ data for better, all of market, insight.

Tony Alexander 5th May 2016

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