Is the recession nearly over for the building industry?

Key themes - March quarter 2010

* The slump in residential building activity has bottomed out. Housing consents have been rising from a low base since the June quarter 2009 and this will feed through to higher activity levels in 2010.

* The industry remains uncertain about the strength and sustainability of the residential recovery. Many companies in the building supply chain believe the recent rise in consents is an inevitable response to a prolonged period of weak activity rather than a return of confidence in the sector. There is also some concern that the key factors supporting current demand - strong net migration and low interest rates - may begin to unwind in 2010.

* The non-residential sector is showing signs of weakness after providing a solid base to the construction sector over the past four years. Development finance has dried up, and it is difficult to make a case for new investment when vacancy rates in commercial, retail and industrial property are steadily rising. With private development in decline, ongoing public spending on infrastructure will become increasingly important to companies involved in project design and heavy construction.

* Total building activity should rise in 2010 if annual housing consents recover towards the 20,000 level, which most industry commentators believe is the minimum required to meet New Zealand's basic housing needs. Even if progress is slow and housing consents only reach 18,000 by year end 2010, this would still represent a 25% increase on 2009 levels. Therefore, while construction activity in 2010 is likely to fall short of the levels seen in 2005-07, we should at least see an improvement on 2009.

Australia's relative strength is a risk factor

* Australia's economic strength could threaten the New Zealand construction industry in two key ways. First, Australia's housing recovery is further progressed than New Zealand's, which could attract more skilled labour over the Tasman. Second, a strong Australian economy is likely to have an adverse effect on New Zealand's net migration flows - an important driver of new housing demand.