Faint light at Nike Free Dam the end of tunnel for builders

Two economic reports are downbeat about the outlook for the construction sector Canterbury reconstruction aside.

Bank of New Zealand head of research Stephen Toplis says the best leading indicator of what's going to happen to house prices and residential building is usually the number of house sales taking place.

Toplis said housing market turnover was consistent with declining house prices, already 3.5 per cent down on a year ago, according to the Real Estate Institute's national index.

Poor prospects for capital gain curb residential investment by keeping speculators and investors on the Nike Free Herr sidelines, he said.

Building permits issued for new dwellings in October were down 24 per cent from their peak last April.

Goldman Sachs economist Philip Borkin points to several other factors expected to constrain building activity over the medium term. Tax changes in the Budget reduced incentives to invest in property.

Households have become more averse to debt and, on the supply side, many providers of mezzanine finance to the construction sector have collapsed. Also, the steep rise in house prices during the last boom effectively excluded many people from the market. That's below the 18,000 new houses needed for a population growing at 1 per cent or 44,000 a year, with an average of two and a half people per household.

"So it's clear stronger building activity than we're forecasting for the near term will be needed in time."

The overall level of building activity has been understated because much of the post earthquake reconstruction needed in Canterbury will be repairs to existing buildings.

But Toplis points out that the pick up in building work will be off a very low base, after construction activity fell 18 per cent in 2008 and then 17 per cent last year.

Borkin estimates total earthquake damage to be just under $5 billion, half in the residential sector, the Billiga Nike Free Run rest spread over non residential buildings and infrastructure.

He expects Canterbury reconstruction won't really pick up until the middle of next year and will be complete two years later.

Elsewhere in the country he sees a "large hole" in non residential construction over the next year or two.

Toplis said a significant amount of office space had come on stream over the past 12 months and the vacancy rate in Auckland, in particular, was relatively high.

"Things on the employment front are headed in the right direction, but the 21.7 per cent drop in consents for offices between the September 2010 quarter and a year earlier says it all."

Overall, he expects the pick up in residential and "other" construction will only just offset the decline in non residential work.

The recovery will be modest, he said, and it will be the end of 2012 before total activity gets back to its peak in December 2008.

"If you've survived what's been thrown at you so far, there's definitely light at the end of the tunnel," Toplis said. "On the other hand, that light is not especially bright."

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