House-building costs in New Zealand increased at the slowest pace in over seven years as high-interest rates and economic uncertainty hampered new home demand.

Construction costs rose 2.4% in the year to December, the lowest annual rise since the 12 months ending in September 2016, according to a report by CoreLogic New Zealand on Thursday in Wellington.

Q4 costs increased 0.8% from the previous quarter.

Falling house prices and a dip in consumer confidence for the majority of the year, stemming from the central bank’s aggressive monetary tightening and weaker economic growth, led to a slowdown in demand for new homes.

Indeed, building consents in the year to October were down 21% compared to the year before.

“The industry is simply facing less pressure on overall capacity, compared to its peak at the end of 2022, where over-stretched builders struggled to keep up with workloads for new houses and renovations,” stated CoreLogic Chief Property Economist Kelvin Davidson. “Records show material supply chains are easing further — with timber prices stabilizing and even some modest falls for metal products.

The construction cost index is based on costs associated with building a 200 square metre brick and tile house, including labour, materials, plant hire and sub-contractors, Bloomberg reports.

The gauge increased by a record 10.4% in 2022 due to supply issues with building materials and a shortage of labourers, as border closures prevented foreign workers from arriving in the country.

In the second half of 2023, house prices began a modest recovery amid expectations the central bank had ended its rate hiking cycle.

That said, construction costs are set to remain subdued this year, says CoreLogic, especially as record net immigration is helping to lower wages. Davidson added that salaries make up 40% of new build costs, excluding land.

“It wouldn’t be a surprise to see the annual rate of change in the index run at 3-4% throughout the year, with builders still reasonably busy but not facing the intensity of recent years. Although it’s unlikely costs for households potentially looking to buy a new build or commission their own project will get any cheaper, at least costs shouldn’t be spiking higher either,” he added.