Economists surprised by sharp fall in construction activity

New data showing a larger-than-expected drop in building activity last year has surprised economists, although rising consent numbers this year suggest residential construction may be nearing a turning point

New Zealand’s construction sector ended 2025 weaker than economists anticipated, with the latest building work data showing a sharper-than-expected decline across both residential and commercial projects.

Westpac senior economist Satish Ranchhod said the volume of building work in the December 2025 quarter was below expected performance

“Building activity was down 3.1% in [the] December [quarter],” Ranchhod said. “That was lower than our forecast for a modest decline, and well below market forecasts for a 1.9% rise.”

ANZ economists also highlighted the scale of the surprise in their latest economic update.

“The volume of building work was much weaker than the 2% increase we had pencilled in,” said the ANZ Weekly Data Wrap report.

The report also noted that earlier growth had been revised down.

“Adding to the weakness, the previous quarter’s growth was revised down from 1.5% to 0.2%.”

Commercial construction drives decline

Both banks identified commercial construction as the main driver of the downturn.

Westpac data shows non-residential building activity fell 6.5% in the quarter, while residential building activity declined 1.1%.

“The 6.5% drop in non-residential construction in December [quarter] was much sharper than expected,” added Ranchhod.

ANZ economists said the weakness was evident across the country and across multiple types of projects.

“Non-residential construction (about 40% of the total) was especially weak, falling 6.5% in Q4,” said the report.

“Weakness in non-residential work was broad based across building types and regions, suggesting more than just quarterly lumpiness.”

However, Ranchhod said commercial construction can be volatile due to the size of individual projects.

Residential construction stabilising

While the latest data points to a weak quarter overall, economists say the residential sector appears to be stabilising after a prolonged downturn.

Ranchhod said housing construction activity has largely flattened out over the past year.

“Looking back over the past year, it looks like home building activity has found a base, with activity effectively trending sideways for much of the past year,” he said.

ANZ economists said the weak construction figures were somewhat unexpected given other indicators.

“The weakness in building work is surprising given recent positivity in residential building consents, concrete production and construction intentions in our ANZBO survey,” they said.

Despite the weak quarter, both banks say rising consent numbers suggest a gradual recovery may be forming.

“With new dwelling consents having now risen to a two-year high, we should see a recovery in residential construction taking shape in the latter part of the year,” Ranchhod said.

ANZ economists expressed a similar view.

“While Q4 building work was underwhelming, building consent data indicates that residential construction work is near its trough and will gradually rise through 2026.”

Consent pipeline strengthening

Recent consent data points to stronger residential activity in the pipeline.

“The number of residential building consents increased 1.9% month-on-month in January and remains well up on a year ago,” ANZ economists said.

However, the outlook for commercial construction appears more subdued.

“Non-residential building activity is typically slower to turn and consents for non-residential work point to continued weakness for a while yet,” said the ANZ report.

For the construction sector, the data highlights the uneven nature of the current cycle – with residential building showing early signs of recovery while commercial work remains under pressure.

Editor’s note: This article was written before the current conflict in the Gulf and does not reflect consequential pricing pressures.