Annual inflation in the year to the December 2021 quarter was 5.9%, well outside the Reserve Bank of New Zealand’s target of keeping inflation between 1 and 3% on average over the medium term.

It is the biggest annual increase since the June 1990 quarter, when inflation increased by 7.6%, though it is worth noting that the Reserve Bank of New Zealand Act 1989 came into effect in February that year.

Statistics New Zealand advises the main driver for this high annual inflation rate was the housing and household utilities group, with prices for construction and rentals for housing increasing. Prices for construction of new dwellings increased 16 percent in the December 2021 quarter compared with the December 2020 quarter.

Statistics New Zealand says the next largest contribution to annual inflation was from the transport group, with increased prices for petrol and second-hand cars. Petrol prices increased 30 percent in the year to the December 2021 quarter. The average price of a litre of 91 octane petrol was $2.45 compared with $1.87 per litre in the December 2020 quarter.

The Infrastructure Commission’s latest Infrastructure Quarterly report shows that construction costs jumped by more than 10% in 2021, and similar increases are forecast for 2022. The increase represents the most rapid growth in prices since the Global Financial Crisis. The Infrastructure Commission’s report is available here.

While the Organisation for Economic Co-operation and Development (OECD) has projected inflation would to fall back to within the Reserve Bank’s target band by 2023 in its 2022 Economic Survey of New Zealand, that will come at the cost of higher interest rates. The Reserve Bank has this week increased the official cash rate (OCR) by 25 basis points to one percent, and current expectations are for the OCR and interest rates to rise substantially from their record low levels.

The high inflation and rising interest rates mean that already high construction costs will rise even further, forcing developers to put some projects on hold as commercial feasibility evaporates. This combined with factors including skills shortages, supply-chain bottlenecks, Covid-19-related shutdowns and reduced ability to secure a residential mortgage create a perfect storm for a slump in the supply of new residential dwellings and general construction activity.

Brad Olsen from Infometrics has said he expects building consent numbers will likely peak in the first half of 2022. If left unchecked, the issues of housing supply and housing unaffordability could worsen significantly this year.

Loading...