There are a great number of reasons why house prices are high in New Zealand, why they have risen so much recently, and why they will keep rising for perhaps another three years. One of those reasons is that building costs are high courtesy of such things as inefficiencies in the building materials sector, lack of bulk construction of similar houses, costs of importing materials from overseas, high and rising construction standards and so on.
This week we learnt that although the annual pace of consumer price inflation in New Zealand is only 0.9%, the costs of residential construction measured in the Capital Goods Price Index release from Statistics NZ have risen 3.1%. It is not always like this. Compared with five years ago while the CPI has risen 12.5% house building costs have only risen 7.9%.
What these numbers tell us is that with house construction picking up construction costs are quickly responding. The worrying thing is that the 3.1% rise in costs has occurred during a period when house construction has only risen to a still well below average level of around 17,000 in the year to March. The graph below tells us that as consent issuance rises toward 30,000 house construction cost inflation will head toward 10%. Building a house is only going to get more expensive.