There is good reason to believe the upturn in residential building is only about half way through, despite international fallout, writes Kiwi economist Rodney Dickens.
An upturn in residential building is underway in much of the country, as shown in the first chart. With it taking around a year for interest rates to impact, quite a bit of the stimulus from the fall in interest rates is still to come, and the upturn should be only around half done. That is, provided it is not derailed too much by fallout from the US-Israel war on Iran.
The boost from the earlier fall in interest rates should be most important for most of this year, meaning there should at least moderate further upside in new dwelling consents. But, in addition to potentially making some people cautious about proceeding with building, the war will boost inflation and has added to the rise in interest rates that started before the war. Allowing for the 12 months or so it takes interest rates to impact new dwelling consents, this implies at least moderate downside risk to building next year.
The spike in the oil price caused by the war has driven up petrol and, more so, diesel prices. This will boost actual consumer price (CPI) inflation to as high as 4% this year, well above the top of the Reserve Bank’s 1-3% target range. However, the Reserve Bank focuses most on its measure of core CPI inflation, shown in the second chart, that was already showing hints of increasing at the end of 2025.
Core CPI inflation removes the impact of factors like the spike in fuel costs to give a better indication of underlying price inflation. But it will include second-round effects like higher transport costs feeding through to higher prices.
Governor Anna Breman has said the Reserve Bank will largely ignore the direct boost to inflation from the war. This view is encouraged by there still being spare capacity in the economy, like the unemployment rate at 5.4% being above the rate consistent with the Reserve Bank’s inflation target. But with core CPI inflation already a bit too high, it is understandable the money market has responded to the inflationary implications of the war by pushing up wholesale interest rates and this is starting to filter through to mortgage rates.
To put the importance of core CPI inflation in context, by remaining low from 2011 to 2022, it allowed the Reserve Bank to be pro-growth and allow a large fall in interest rates. This was a key factor in the mega-boom in new dwelling consents over this period that is shown in the first chart. Although the mega-boom was also helped by policies like the Auckland Unitary Plan, which unleashed a mega-boom in townhouse building.
The fact the starting point for the latest upturn in building is much higher core CPI inflation, with some upside likely from the war, means little scope for a protracted upturn in building and potential downside risk for 2027, even if population growth improves as I expect.
