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Statement of Intent 09/12

Strategic environment in which the Department operates

Introduction

The global economy is in its weakest period of growth since the Second World War and New Zealand is no exception. The general economy is contracting, with a substantial impact on the building and housing sector. Forecasts from the Reserve Bank, banks and other agencies for both the sector and the wider economy have become more pessimistic and are now not expecting recovery until the 2010-2011 year.

In the building and construction sector, the recent history and immediate outlook are challenging. The value and volume of all building work fell during the December 2008 quarter, and the downward trend is expected to continue through the March 2009 quarter and beyond. Business confidence in the sector remains low, according to the NZIER April 2009 Quarterly Survey of Business Opinion. It anticipates a worsening situation for the next six months in all aspects of the industry except costs. Access to development finance is severely constrained and, while mortgage interest rates have dropped, banks' lending criteria have been tightened and larger deposits are now required.

Unlike many other countries, New Zealand does not have an over supply of housing. This lowered level of building is expected to create future pressure in the housing market, with supply issues emerging over the next few years. The downturn in the sector also has flow-on consequences for sector employment. If, as is forecast, this continues beyond the near term, there is a risk that the sector will lack the necessary capacity and skill level to respond effectively to any upturn in the market that may occur in late 2009 or early 2010.

Lifting skills and enhancing productivity in the sector, simplifying and streamlining the regulatory framework, together with the additional stimulus provided by the Government building programme, will enable the sector to play an important role in the return to economic growth.

Economic factors

  • The construction sector contributes around 5 percent of GDP to the New Zealand economy, with productivity in the sector being the lowest of all industries measured.
  • The value of building consents issued, an indicator of future building work, has been trending sharply downwards and is not projected to grow substantially in the near future.
  • Building costs are continuing to rise, but more slowly as a result of the lower demand.

Labour market

  • About 8.1 percent of employed people in New Zealand work in the construction sector. Employment in construction has been falling since it peaked in the December 2006 quarter.
  • Around 25 percent of construction workers hold no formal qualification and 28 percent high school qualifications only.
  • The decline in construction activity will flow through into employment numbers, with some staff previously employed in residential construction being absorbed into non-residential construction, while others will be laid off. The decline may also lie behind the climbing net departure figures for those employed in construction and building-related trades in New Zealand.
  • The sector faces a skill retention problem and, in the short to medium term, will struggle to respond to any upswing in demand from population growth and economic recovery.
  • The sector's longer-term challenge is to improve overall productivity and skill levels to reduce the cost of delivering New Zealand's infrastructure needs and to increase the profitability of sector firms.

Homeownership and affordability

  • Median house prices peaked in November 2007 but have since declined.
  • Affordability has improved with declining house prices and lower mortgage interest rates.
  • House sales remain low, in part because of stricter bank lending criteria and weaker buying demand due to lower net migration and a weakening labour market and economy.

Trends in rental housing

  • Rent increases have remained stable across all types of rental properties, and continue to show lower rates of growth than house prices since the December 2007 quarter.
  • The percentage of households in rental housing has increased, and is expected to continue growing with private rentals projected to increase 40 percent by 2016.
  • The rental market is expected to become more diverse, with an increasing number of households with children and older people expected to remain in rental housing for longer periods.

Future housing need

  • New Zealand's population is projected to grow from 4.29 million in December 2008 to 5 million in the late 2020s.
  • This population growth is expected to put pressure on housing, especially in Auckland and other major cities as the percentage of New Zealand's population living in urban centres is expected to increase.