New Construction Pipeline Report at odds with industry feedback

Six-year report forecasts sector slump for residential construction, despite widespread optimism and fully booked builders

The National Construction Pipeline Report 2020, commissioned by MBIE and jointly prepared by BRANZ and market research outfit Pacifecon (NZ) Ltd, has been released and it forecasts a multi-billion dollar drop in construction work over the next two years due to the impact of the pandemic, including a more than 40% drop in dwelling consents.

The pipeline report shows total construction value dropping by 31% by 2023, with residential construction hardest hit, falling by 43%. Non-residential was forecast to fall to nearly half in the next year then recover. For a summary, see the infographic HERE. For the full report, click HERE.

The annual report, which began in 2013, reports on building activity for the coming six years and aims to provide a clear pipeline of building and construction work to help the sector plan for future demand.

Industry dubious

However, on this occasion, builders and industry bodies do not seem convinced that the predicted decline will eventuate.

Several builders interviewed by Under Construction have said they have work lined up all through 2021, with some into 2022. This is reflected by Construction Industry Council chair Graham Burke, who said a survey of members in December produced a different result from the pipeline 2020 report’s forecasts.

It found that demand was good in construction and especially in residential building, which was “going gangbusters”. There were a few issues around supply of materials, but not in demand as was forecast in the report.

Earlier forecasts had the construction industry hitting the wall in the December quarter 2020, but the actual result was the opposite. However, Burke said the industry had always been fraught with peaks and troughs.

Room for interpretation

The Construction Pipeline Report 2020 itself acknowledges the uncertainty faced when preparing the report in its overview:

“An important aspect of this report is the significant uncertainty presented by the Covid-19 pandemic. The analysis presented within this report is our best effort at estimating the likely impact of the pandemic on construction activity moving forward.

“However, a lot of uncertainty remains throughout the sector, and the ramifications of the pandemic are likely to be felt for several years. The severity of the pandemic on construction activity is likely to be impacted by several factors that sit outside of the current modelling. There may also be interventions to try and tackle the impact of the pandemic that have yet to be implemented or have not yet been considered.”

It is also worth noting that the forecasting that provides the basis of this report was completed on 24 September 2020, based on the Stats NZ March 2020 release of 2019 gross fixed capital formation data and other relevant data.

The key variables used in the forecast were as follows:

• GDP growth is forecast to fall by about -4% for the year ending December 2020.

The latest figures from Stats NZ, covering the September 2020 quarter, saw GDP growth at -2.2%. Whether it hit -4% for the year ending December 2020 remains to be seen, and figures will be updated in March 2021.

• The Official Cash Rate (OCR) is forecast to be cut further to -0.5% by mid-2021. This rate is forecast to be maintained for just over a year, before incrementally increasing throughout the forecast period.

As of December 2020, economists were no longer predicting the OCR to drop below zero. See article from economist Tony Alexander in the upcoming issue of Under Construction.

• Net migration is forecast to sit close to 0 for the next couple of years, before increasing to about 40,000 for the year ending 2024.

Under Construction will continue to report on all forecasts – positive and negative – as well as providing up to date information on the metrics that influence these.