Cautious recovery for NZ construction sector amid global uncertainty

According to Rider Levett Bucknall’s (RLB) Forecast 115 report – New Zealand Trends in Property and Construction – New Zealand’s construction sector is beginning to show early signs of recovery, but significant economic headwinds and global uncertainty continue to weigh in.  

Prepared by the New Zealand Institute of Economic Research (NZIER) exclusively for RLB,  RLB Director Mr. Grant Watkins said, “despite improved sentiment overall, the sector remains subdued following a contraction in late 2025, with both residential and non-residential construction activity declining.” 

Construction activity remains subdued, with uneven regional performance 

Stats NZ Building Work Put in Place showed construction activity fell in the December 2025 quarter, driven by a decline in both residential and non-residential construction. 

The contraction in residential construction in December 2025 reverses the small lift seen in the previous quarter and reflects ongoing weakness in project pipelines. Most regions experienced reduced activity, particularly Auckland, although Canterbury showed signs of recovery. 

Early indicators point to a gradual recovery in residential demand

Despite softness in residential construction activity in the December quarter, dwelling consent issuance points to a recovery in residential construction demand.

The annual number of dwelling consents issued totalled almost 37,000 for the year to January 2026, over 9 percent higher than year-ago levels. 

RLB expects the recovery in residential construction demand will be concentrated in medium density housing, especially as higher fuel costs push demand closer to urban centres.  

Non-residential construction remains mixed and subdued

Mr. Watkins continued, “Non-residential demand continues to lag, with notable declines in sectors such as healthcare and retail construction.”  

“Regional performance varies significantly, with stronger activity in Waikato and Wellington offsetting declines in Otago and other areas. Industrial construction demand is growing, supported by a recovery in manufacturing demand and continued growth in e-commerce,” he said. 

Pricing power remains weak despite easing cost pressures (pre-2026) 

Forecast 115 noted that before recent global developments, cost pressures in the construction sector had begun to ease, and many firms were even reducing prices due to weak demand. This indicates limited pricing power across the sector, with competition and subdued workloads preventing firms from recovering margins.  

Infrastructure pipeline remains large but shows signs of softening New Zealand’s infrastructure pipeline remains substantial at $268 billion, though slightly down from the previous quarter. While transport and water projects continue to dominate investment, a decline in projects in the planning stage suggests potential delays or reprioritisation of future work.  

Middle East crisis driving renewed cost pressures and uncertainty  

While the foundations for a recovery are emerging – supported by improving confidence, lower interest rates, and rising housing demand – the sector remains vulnerable to external shocks.  

Non-residential construction cost inflation picked up in December 2025, with the 0.8 percent increase over the quarter building on the 0.2 percent increase in the previous quarter.  

This brought the annual inflation rate in non-residential construction costs to 1.5 percent, suggesting a recovery in construction demand was reducing spare capacity in the construction sector and driving up cost pressures in the December quarter. 

According to RLB, conditions have shifted significantly since early 2026, as military action by the US and Israel against Iran sparked a major global energy shock as Iran closed off the Strait of Hormuz in retaliation.  

The sharp rise in global oil prices and constraints on the supply of oil and gas has pushed up costs for firms and households. 

While we expect higher fuel prices and supply chain disruptions to drive a sharp increase in construction costs, there is a high degree of uncertainty over the magnitude and persistence of these inflation effects. 

Many have drawn comparisons with the COVID-19 pandemic, but we do not expect construction cost increases to be as large given the limitations on the fiscal response, in the form of support payments, as well as the absence of labour shortages. 

Mr. Watkins concluded, “RLB forecasts annual non-residential construction cost inflation to lift to a peak of just over 4 percent in the second half of this year, before easing back towards 3.2 percent over the longer term.”  

“These forecasts are based on the assumption that disruptions in the Strait of Hormuz will be resolved over the coming months, and that longer-term inflation expectations remain anchored with only a muted change to price and wage setting behaviour,” he said.