NZ Construction Wrap Up | Q2 2025

TLDR:

• Overall market flat: Residential work increased modestly (+2.6 percent) while non-residential continued to contract (–3.9 percent). National activity remains about 25 percent below the 2022 peak.

• Costs stabilising: Construction cost inflation is at its lowest in over a decade, with non-residential cost growth at 1.8 percent year-on-year. Material supply chains have normalised and labour cost pressures have eased.

• Labour conditions easing: Workforce contraction of around 6 percent year-on-year has removed some heat. Firms report staffing levels are broadly sufficient.

• Sentiment cautious: Only 37 percent of industry leaders report confidence in current economic conditions, though optimism increases looking six months ahead.

• Infrastructure pipeline holding steady: Te Waihanga’s March 2025 pipeline update values the funded pipeline at $111.6 billion, with $16.6 billion scheduled for spend in 2025.

• Education builds lead public sector activity: Strong MoE pipeline with Auckland receiving a $120 million roll-growth injection, standardised classroom designs reducing cost per unit.

  
  

Our Opinion

Key Market Activity Indicators

Residential vs Non-Residential

The March 2025 quarter showed the first stabilisation after two years of decline. Residential activity grew 2.6 percent, assisted by small improvements in lending conditions and a slight rebound in consents. Non-residential fell 3.9 percent, with Auckland particularly soft. Total volumes remain significantly below the 2022 peak, reflecting both high interest rates and tighter fiscal settings.

Oxford Economics revised its 2025 forecast to a 4.3 percent decline in work done, indicating continued weakness across non-residential and commercial property. Analysts widely expect the trough to extend through late 2025 before recovery momentum builds in 2026.

Cost and Supply Chain Conditions

Cost escalation is no longer driving market instability. RLB’s Q2 forecast shows non-residential costs rose only 0.2 percent in the March quarter, with an annual inflation rate of 1.8 percent...the lowest since 2013. Similar patterns are evident in residential work, where quarterly inflation is near flat and annual increases are around 1.2 percent.

Supply chains for timber, steel, and finishing materials have returned to normal lead times. Prices for timber and metals have eased modestly compared to 2022–23 peaks. Concrete and insulation products remain firm, reflecting energy input costs, but no longer show runaway inflation.

Labour market data indicates around 12,000 fewer construction jobs compared to mid-2024, but this has alleviated acute shortages. Surveys report that 57 percent of firms now have sufficient staff, with only specialist roles (site managers, QSs, façade trades) under pressure. Wage growth has slowed and productivity pressures are easing.

Sentiment and Business Confidence

BDO’s 2025 Construction Report confirms industry sentiment is still fragile. Only 37 percent of leaders report confidence in the present economy, citing cashflow and pipeline uncertainty. Forward work visibility beyond 12 months is weak, with only 41 percent of firms reporting a strong pipeline.

However, confidence improves when looking ahead six months, with 67 percent expressing optimism. This reflects expectations of interest rate easing, public sector work stability, and the Government’s “Investment Boost” incentive package.

Infrastructure and Public Sector Drivers

Public infrastructure spending is now the primary stabiliser. Te Waihanga’s March 2025 snapshot lists a total pipeline of $206.9 billion, of which $111.6 billion is funded. $16.6 billion is scheduled for 2025 and $15.5 billion for 2026. Major programmes include transport in Canterbury ($10.4 billion) and Auckland’s $13.8 billion water infrastructure upgrades.

Within the education sector, the Ministry of Education has become the anchor client. In July 2025, the Government confirmed a $120 million package to deliver 137 classrooms across Auckland, with completion timetables compressed to within 12 months. Standardised, modular classrooms are now the norm, with reported average costs falling from over $1.2 million per room in 2023 to around $620,000 in 2025. This is one of the clearest examples of how scale and repetition are generating efficiency.

Health projects are progressing more cautiously, with some hospital redevelopments delayed or rescoped to manage budgets. Local government is also holding back discretionary capital programmes until debt ratios improve.

Regulatory and Policy Context

Two policy changes are particularly relevant in Q2 2025:

1. School Property Reform – Establishment of the New Zealand School Property Agency, due to take over from MoE in 2026, signalling a new approach to governance and procurement in education builds.

2. Resource Management Reform – The Resource Management (Consenting and Other System Changes) Amendment Act 2025 has been enacted. Its impact on shortening consent times will take years to realise, but councils are beginning to shift processes toward digitalised, standardised approvals.

   
   

Risks and Outlook for the Rest of 2025

• Private sector demand remains weak – Residential recovery is tentative and non-residential is subdued.

• Fiscal constraint – Government continues to prioritise core projects while shelving lower-priority ones.

• Interest rates – Still high, though expected to fall gradually, leaving financing conditions tight through late 2025.

• Consent bottlenecks – Still a significant drag despite reform signalling.

On the positive side, construction costs are now stable, labour supply is manageable, and the infrastructure pipeline is robust. This sets a foundation for more sustainable growth as the cycle turns in 2026.

The headline is stability, with costs under control and labour pressures easing. The engine keeping the sector running is public sector infrastructure, especially education, water, and transport. For the remainder of 2025, firms should position themselves around government-backed projects, manage cashflow carefully, and prepare to scale as the cycle begins to lift in 2026.

Sources

• Oxford Economics, Construction Outlook Q2 2025

• Westpac, NZ Building Work Put in Place – March Quarter 2025

• Rider Levett Bucknall, Forecast Report 112 – Q2 2025

• Cost Consultants, Market Report June 2025

• BDO, Construction Sector Report 2025

• Te Waihanga, National Infrastructure Pipeline Snapshot March 2025

• NZ Government, Education Infrastructure Announcements July 2025