June 25, 2017 / 11:29 PM / a month ago

Soaring building costs sound sour note for 'rock star' New Zealand economy

Recently completed residential apartment blocks are seen behind a construction site in central Auckland, New Zealand, June 25, 2017.David Gray

WELLINGTON (Reuters) - Newly qualified New Zealand carpenters are commanding six figure salaries and construction costs have risen by half in under three years, symptoms of an unprecedented building boom straining the South Pacific nation's much-envied economy.

Fueled by the record number of migrants needing houses and by repairs to roads and buildings damaged by several major earthquakes, construction accounted for 13 percent of the New Zealand economy in the March quarter. The nationwide build is forecast to hit NZ$37 billion ($26.9 billion) this year.

But the sector is hitting headwinds that are frustrating companies and builders and making the central bank wary.

Mark Adamson, chief executive of the country's largest construction firm, Fletcher Building (FBU.NZ), said the labor market was so tight, manual workers can now command top dollar to "hold a hammer".

"I got a quote yesterday: NZ$65 an hour, you'd get a hundred grand for driving a forklift - there's just not enough people to go around," he told Reuters. Fletcher Building shares have lost a quarter of their value so far this year after the labor shortage prompted a profit warning, shocking investors who saw the company as a proxy for the "rock star" New Zealand economy.

Industry-wide, costs for non-residential construction have grown around 50 percent since 2015, according to project management firm Rider Levett Bucknall.

Meanwhile, unemployment is below 5 percent and laborers' wages are the fastest-rising of any occupation, adding 17.5 percent since 2009, according to Statistics New Zealand.

Across Auckland, the engine-room of the construction boom, builders told Reuters that newly qualified carpenters were demanding NZ$50 or more an hour.

That puts their annual salary at over NZ$100,000 - above the median annual pay of a bank manager, and more than double that of a schoolteacher, according to job classifieds website Trade Me (TME.NZ).

"You can't get good staff. That's what it comes down to really," said Steve Grant, an Auckland builder who employs four people.

"We don't get the quality of workers that we used to and you've gotta pay more for it."

Bottlenecks

The builders' challenges cut to the heart of the jitters in New Zealand's economy, which has grown at an average of nearly 3 percent a year since 2012 and was described by the OECD as the envy of the developed world.

A wobble in construction activity put March-quarter growth behind expectations and raised questions over the massive building pipeline.

Cranes located on construction sites are seen in central Auckland, New Zealand, June 25, 2017.David Gray

At the same time, the country's biggest city is bursting at the seams. The local government estimates the city needs to add 14,000 new homes a year for three decades.

"Wherever you look in Auckland and the construction sector there is a capacity issue, said Ron Angel, the construction industry coordinator for union E tu.

"Can we get enough concrete? Can we get enough roofing? Can we actually get a truck to get it to the job at 10am when I need it there?"

The problem caught the eye of the country's central bankers, coming as record migration spurs soaring demand for housing.

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"You're certainly seeing bottlenecks appear there," said the Reserve Bank of New Zealand (RBNZ) governor Graeme Wheeler at a recent press conference, adding that construction was an area the bank was "watching closely".

To be sure, the problems are more setbacks than portents of doom.

But economists say the government's forecasts of almost 3.7 percent growth in 2018 are now unrealistic and even the RBNZ's projections of 3.4 percent appear too high.

"Issues with labor especially are already starting to bite," said Satish Ranchod, senior economist at Westpac Bank, who was projecting GDP growth of around 3 percent by 2020.

Housing Heat

Also of concern is the construction industry's failure to keep up with the thousands of houses needed to meet demand from migrants and returning New Zealanders that is sending home prices ever higher.

The issue has proven particularly thorny for the governing National Party, which faces an election this year and is trying to placate voters increasingly priced out of the market.

It is also testing the limits of the monetary policy levers available to central bank, which moved last year to tighten lending rules.

That temporarily slowed price growth, but the solution is a greater supply of housing.

"The problem is we've got capacity constraints," said Cameron Bagrie, chief economist at ANZ Bank. "Good luck trying to find people to build the houses.

Editing by Lincoln Feast

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