Wellington apartment construction - Nov 2022
Building supply sales fall, but stock levels remain higher

Recent data has been showing a downshift in residential building activity and less retail purchasing of hardware and DIY items. Although stock levels have also been falling, retail building supply stocks remain considerably higher than pre-pandemic. Higher stock levels but still-falling sales activity suggests that some businesses will be holding an uncomfortable level of stock, and will need to be careful about pricing to ensure they can cover their costs.

Residential work put in place down, and revised lower

Recent work put in place (WPIP) data showed residential activity volumes falling for a third consecutive quarter, with residential building activity in the June 2023 quarter sitting 7.6% below the peak seen in September 2022.

Although we were expecting a fall in activity, revisions to residential WPIP means the end point is now worse than originally anticipated. The original March 2023 data, published in June 2023, pointed to residential WPIP falling 0.8% (s.a.) in March. But in September 2023, the 0.8% fall became a 4.3% fall, with a further 2.0% fall in the June 2023 quarter (off the lower base).

As Chart 1 shows, residential WPIP is now at its lowest level since the end of 2021 on the newly revised data.

The revisions have been making it more difficult to judge the direction and momentum in the residential building space. Yet for the added uncertainty that they provide, the revisions also reflect better information over time.

Since COVID-19, Stats NZ have introduced an additional survey of medium-value projects that previously would have just been modelled based on building consent data and previous building timeframes. With materials shortages, staff shortages, other delays, and some invariable catch-up, the additional survey provides Stats NZ with the ability to compare the surveyed medium-value project results with their model estimates.

As more results are provided (sometimes long after the fact), the adjustments are themselves adjusted. For example, in the March 2023 quarter (as originally published), Stats NZ made a 7.3% upwards adjustment to its modelled work expectations for the March quarter WPIP figure. But in the revised published data, that adjustment was revised to a 3.5% upwards adjustment to the March quarter figure.

Looking through recent adjustments, and revisions to the adjustments, there’s no clear pattern. As a result, there’s no strong view of what way future revisions might move in.

Despite the challenges that come with interpreting revised data, it’s clear that residential WPIP is weakening still, and is likely at its lowest point in about 1.5 years.

Building supplies sales fall for last 1.5 years

This weaker level of construction activity comes as retail purchases of building related supplies (technically “hardware, building, and garden supplies”) fell further in the June 2023 quarter. The volume of retail building supplies sold fell 4.8% (seasonally adjusted) from March, the equal worst performing spending decline (in line with the clothing and footwear spending type).

As Chart 2 shows, retail building supplies sales volumes have been falling consistently for the last 1.5 years. In total retail building supplies sales volumes have fallen 24% since the high point in December 2021. Such a large fall sounds huge, but has to be kept in context, given retail building supplies sales volumes increased but a massive 33% between the end of 2019 and the end of 2021. Overall, the volume of retail building supplies sales in mid-2023 were still 1.7% higher than the end of 2019 (pre-pandemic).

The dollar value of retail building supplies sales is considerably larger now than pre-pandemic, owing to the increased prices in recent years. Looking at nominal spending values, retail building supplies sales are still up 20% from pre-pandemic levels, with a 42% increase in sales values between December 2019 and the peak in December 2021.

Retail trade deflators shows that retail building supplies prices have increased by around 17% from pre-pandemic levels.

Building supplies stocks still up 8% from 2019

Although retail building supplies sales volumes have been falling, there have obviously still been sales. These sales have been consuming part of the higher level of building supplies stocks that had been ordered by retail businesses, but not enough to bring down stock levels completely.

Stats NZ only reports on the nominal (not inflation-adjusted) value of retails stocks held. In the June 2023 quarter, the value of building supplies stocks was sitting 27% higher than pre-pandemic levels, second only to department stores stocks. For context, overall core retail stocks are sitting 16% higher than pre-pandemic.

Infometrics estimates, using retail trade deflators, suggests that the inflation-adjusted volume of building supplies stocks is lower than the value measure suggests, with stock volumes estimated to be 8% higher than pre-pandemic levels (see Chart 3). Although 8% doesn’t sound like a lot, our volumes estimate for core retail stock volumes overall is around 0.2% above pre-pandemic levels.

In fact, aside from department stores, building supplies stock levels are estimated to be the largest relative to pre-pandemic levels of the remaining retail categories.

Falling activity highlights challenges

Falling residential building activity, and falling retail building supplies sales volumes, all add to a picture of a more challenging outlook for the residential construction industry – as was already apparent. The fall in stocks with sales still elevated (yet falling) shows that businesses have stopped ordering and restocking like they did earlier in the pandemic.

But the still-high stock holdings presents some difficulties for suppliers, with a larger volume of materials on hand and ready for sale, but less sales activity coming in the door. Although we’re not expecting fire sales, there does seem to be the potential for some increased deal-making and discounting to occur as suppliers look to move stock along. Additionally, the levels of stock and downwards momentum in sales is likely to keep price increases in check to a greater degree going forward, with recent data suggesting a continued slowing in price increases – and in some cases, cheaper materials.

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