New Zealand building costs are expected to moderate given the low inflation environment, an inability to pass on rising costs, and as migrants help fill building skill shortages.

Non-residential construction cost inflation will fall to a 4.3 per cent annual pace in the final quarter of this year, from 5.5 per cent in the second quarter, according to a forecast by the New Zealand Institute of Economic Research for property consultancy Rider Levett Bucknall’s fourth-quarter report on trends in property and construction.

Still, the NZIER says it expects annual construction cost inflation to remain “relatively high” at over 4 per cent through to 2019.

Construction costs have been rising at a faster pace than overall inflation, with data released Tuesday showing consumer prices accelerated at an annual pace of just 1.9 per cent in the third quarter.

Construction industry demand is being underpinned by record tourism and migration levels although higher construction and funding costs and capacity pressures are seen limiting the extent of future growth.

“Despite the solid construction growth outlook for the next three years, we do not expect the inflation to be as sharp as the mid-2000s given that the lower inflation environment limits the extent to which rising costs can be passed on quickly,” the report said.

”Strong net migration is helping to mitigate skills shortages in the building sector.”

The report notes that Auckland continues to lead the way in construction demand, although higher construction and funding costs and capacity pressures will likely limit the extent of growth in construction activity.

In Wellington, robust demand for new hotels and retail outlets over the past year had been offset by lower demand for office buildings and industrial buildings. Meanwhile, in Otago, demand for new hotels and retail outlets had fallen over the past year.

In Canterbury, non-residential consent issuance continued to decline, reflecting lower demand for health and education facilities.

By Tina Morrison