New Zealand’s construction sector is beginning to show early signs of recovery — but significant economic headwinds and renewed global uncertainty continue to weigh on momentum. RLB’s latest Forecast 115 report, prepared exclusively by the New Zealand Institute of Economic Research (NZIER), sets out where the sector stands and what to expect through the rest of 2026.
Construction activity: subdued, with uneven regional performance
Stats NZ Building Work Put in Place data shows construction activity fell in the December 2025 quarter, with both residential and non-residential segments contracting. The dip in residential activity reverses the modest lift seen in the prior quarter and reflects ongoing weakness in project pipelines.
Regional performance is uneven. Auckland experienced notable declines, while Canterbury showed early signs of recovery.
Residential demand: a gradual recovery is taking shape
Despite the December quarter softness, dwelling consent data points to improving residential demand. Annual consent issuance totalled close to 37,000 for the year to January 2026 — more than 9 percent higher than year-ago levels.
RLB expects recovery to concentrate in medium-density housing, with higher fuel costs increasing demand for urban-proximate locations.
Non-residential construction: mixed and lagging
Non-residential construction remains subdued. Healthcare and retail construction have seen notable declines. Waikato and Wellington are tracking stronger, partially offsetting falls in Otago and other regions. Industrial construction is a relative bright spot, supported by a recovery in manufacturing and continued growth in e-commerce.
Cost pressures: limited pricing power before the 2026 shock
Before recent global developments, cost pressures had been easing. Many firms were reducing prices in response to weak demand — a sign of limited pricing power across the sector, with competition and low workloads preventing margin recovery.
Infrastructure pipeline: large but softening at the edges
New Zealand’s infrastructure pipeline remains substantial at $268 billion, though slightly down from the previous quarter. Transport and water projects continue to dominate. A decline in projects at the planning stage signals potential delays or reprioritisation of future work.
The Middle East crisis: a new layer of cost pressure
Conditions have shifted materially since early 2026. Military action by the US and Israel against Iran prompted Iran to close the Strait of Hormuz, triggering a global energy shock. The sharp rise in oil prices and constrained supply of oil and gas has pushed up costs for firms and households across the board.
Non-residential construction cost inflation was already picking up — rising 0.8 percent in the December 2025 quarter after 0.2 percent in the prior quarter, bringing the annual rate to 1.5 percent. The energy shock adds further pressure on top of this trajectory.
Comparisons with COVID-19 are understandable, but RLB does not expect cost increases of the same magnitude. Fiscal constraints limit the scale of support payments, and labour shortages are not a feature of the current environment.
Outlook: inflation forecast to peak mid-2026
RLB Director Grant Watkins notes that the foundations for recovery are present — improving confidence, lower interest rates, and rising housing demand. But external shocks remain a real risk.
RLB forecasts annual non-residential construction cost inflation to lift to a peak of just over 4 percent in the second half of this year, before easing back towards 3.2 percent over the longer term. These forecasts assume disruptions in the Strait of Hormuz will be resolved over the coming months, and that longer-term inflation expectations remain anchored with only a muted change to price and wage-setting behaviour.
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