REPORT: The Truth Behind the Housing Crisis

There have been countless conversations about affordable housing and what (or who) is to blame. Little of this conversation, however, has taken into consideration the problem of expensive materials. Could addressing this be the solution to affordable housing?

Whenever talk turns to housing, whether it is on the news or in a brave office conversation, tension often rises. This applies as much for young hopeful homeowners being told their dream of owning a first home is slipping further from their reach, as for single homeowners feeling regret at not investing more when they had the chance. The housing crisis has been a growing topical point of conversation for the past few years and, as a highly contentious issue in the coming elections, it won’t be lessening any time soon.

National argues New Zealand has a “strong, growing economy” and that people are now paying less in interest than when they were elected. Their plans include reducing the cost of building by passing legislation that restricts council development charges, as well as creating a $1 billion Housing Infrastructure Fund. Meanwhile, Labour accuses National of being “incapable of fixing the problem” and has its own plan to tackle the crisis. Labour intends cracking down on ‘speculators’, such as foreign buyers and those looking to make quick capital gain. They also say they will work with the private sector to “cut through red tape and get new homes built faster”.

Either way, New Zealand is facing a housing crisis and unless more homes are built, reports suggest there may not be enough rooms to house New Zealand’s future population. One such report, by independent public policy think tank, The New Zealand Initiative, states that by 2031 the country will face a housing shortage of 113,800 homes. Likewise, a media statement released by Andrew Little revealed that Treasury papers released in February showed a massive housing shortage. The papers, released under the Official Information Act, show that ANZ estimated a current nationwide shortage of 60,000 houses.

The solution seems simple – to fix the housing crisis we need to build more affordable homes. Unfortunately, this is apparently not a straightforward, or affordable, option. So, what is stopping us?

THROUGH THE (UNAFFORDABLE) ROOF

Data is showing it isn’t easy to build affordable homes in New Zealand. Statistics New Zealand’s Consumers Price Index March 2017 quarter report states house-related prices continue to increase. It states annual housing construction costs for newly built houses rose 6.7 percent in the March 2017 year. Auckland saw the brunt of the increase with an 8.0 percent increase, while Christchurch saw a 3.6 percent increase.

The latest QV Costbuilder data shows the average cost (excluding land, demolition of existing structures, utilities etc.) of building a standard 140m², three-bedroom, one-bathroom home in New Zealand for the four main centres is; Auckland $272,000, Wellington $258,000, Christchurch $277,000 and Dunedin $254,000.

Auckland costs have risen 19.0 percent since 2007 and 2.32 percent since 2016 in the house category (sized between 100m² and 200m²). Similarly, Wellington costs have risen 17.4 percent since 2007 and 2.43 percent since 2016; Christchurch costs have risen 26.9 percent since 2007 and 1.92 percent since 2016; and Dunedin costs have risen 22.2 percent since 2007 and 2.12 percent since 2016.

This all brings us to one simple question, Is it these rises that are stopping us from building affordable housing?

A common nuisance in the industry is the cost of materials, something that has clearly risen in the past few years, this has been noted by both the data and those in the field.

Managing director of Love and Co property developers, John Love, says their data shows an increase in building materials: “Our data from real developments would indicate that build costs have almost doubled in the past five years,” he says. “Other than the obvious increase in sale price required to break even, the ability to obtain financing becomes far more difficult as the amount required increases proportionally. In turn, this results in the overall cost of the project significantly increasing and it also often leads to projects not commencing, resulting in a shortage of supply.”
In terms of a new development, whether you are looking at an individual home or an apartment development, Love says the biggest cost is either the land or building costs. “This is then followed by finance and consulting costs,” he says.

Similarly, Bruce Kohn, CEO of The Building Industry Federation, says the average cost of building a standard house has increased. “Exclusive of land cost, [building] is up about 15 percent in the past three years, and materials price increases are probably up over the same period by 6-8 percent,” he says. “As a generality, building products and materials prices, like all other retail and trade products, are subject to supply and demand. When demand is high, more opportunities arise for increased margins. In the current building boom environment, however, upward movement has for the most part been limited to about the annual inflation rate. Intense competition across most sectors of the market has meant little freedom for upward movement above normal business protection of covering off increased costs and services to businesses.”

Kohn says material prices generally make up about 27 percent of the total average cost to build a home in New Zealand. “Depending, of course, on the quality of materials and products purchased,” he says.

There are numerous reasons for this increase: inflation, demand… the list goes on. We have seen this in the rises and falls that came with the Christchurch rebuild and the Global Financial Crisis. Associate director David Mason of Cuesko Limited says that since the GFC, “the rate of escalation on residential construction has grown from 1-2 percent per year to the current rate of 6-7 percent. To put that into perspective, it’s an increase of 30 percent since 2011. However, the cost of building materials only comprises approximately 10 percent of this increase. Hikes in labour rates and contractor’s margins have had a greater effect.” All of these factors are affecting the cost of land, labour and, of course, materials.

But this is not exactly a new problem.

In November 2013, Building and Construction Minister, Dr Nick Smith, released a statement announcing the government was working to bring down the cost of home building activities. “Building materials costs are too high and can be as much as 30 percent more in New Zealand than in Australia, according to the Productivity Commission. The industry needs a shake up through increased competition and greater transparency to ensure Kiwi families can get access to more fairly priced building materials and homes,” he said.

When asked about the current cost of building materials, Dr Smith says they are “a part of the housing affordability story, but the most important part is land supply”.

Smith says the government is contributing to more affordable building materials by removing tariffs on imported products. This is something it introduced in its Budget, 2014. This temporary tariff concession scheme, and the suspended anti-dumping duties on key residential building materials, lower the cost of importing these products. Something government understands is important.

As Smith notes, there are, of course, other factors in the building stages of a home that are not the cost of materials. Labour and land are other increasing costs that, many argue, affects the affordability of a build.

“Over the past 25 years, the price of an average section in Auckland has increased tenfold, from $53,000 to $530,000, whereas the price of the building has increased threefold, from $120,000 to $360,000. The key affordability issue is land supply and the restrictive planning policies that have enabled super-profits to be made for those who own land inside urban limits. The government has been systematically dismantling these through special housing areas, the new Unitary Plan for Auckland, the Urban Development National Policy Statement and the passage last month of the RMA reform bill,” Smith says.

From the June 2014 quarter to the June 2015 quarter, labour costs, one of the other key factors in unaffordable housing, have increased by 1.5 percent, according to Statistics New Zealand’s Labour Cost Index. This is on top of varying other reasons those in the field are experiencing.

John Love has noticed “inefficient labour structures”, which he says create multiple layers of subcontractors. He says “this is due to the inflexibility in scaling up and down employee numbers”. This is also one of the key drivers that he believes affects the housing crisis.

Likewise, Bruce Kohn acknowledges labour as a growing problem. “This boom period for the industry has exacerbated a shortage of specialist skilled tradespeople such as plumbers, electricians and builders. Many left for positions in Australia and the Middle East or got out of the industry during the downturn of the previous decade. Numbers of new recruits into the industry went down because younger people saw little future in an industry subject to ‘boom and bust’ cycles. Now, when demand is high, numbers are short and those who have required skills are able to obtain higher income levels in other sectors of the economy.”

There are, however, efforts by the industry to gain new, skilled tradespeople. “The industry is working to increase the flow of new recruits through innovative changes to its training programmes, which will make access to acquiring necessary skills much easier. There will be an emphasis on skill-by-skill acquisition under supervision on building sites, so a trainee can learn one skill, which makes him or her employable, and then go on if they are so inclined, to learn more skills which, when combined, add up to a tertiary qualification,” Kohn says.

Cuesko’s Mason also acknowledges the increase in material costs, but believes the biggest hike has been labour costs and contractors’ margins. He puts it down to the simple economics of supply and demand.

“The Christchurch rebuild, followed by a rampant Auckland construction market, has driven costs up. Clients are demanding early completion dates, but there’s a significant shortage of skilled labour, so main contractors and their subcontractors are pricing a lot of contingency and margin into their tenders,” he says.

COMPETITION IN THE MARKET (WHAT MARKET?)

There are many factors likely to affect the cost of materials, land and labour. In terms of the former, there are some who believe it comes down to competition, or the lack of it.

Mason says there has historically been limited competition in New Zealand for the supply of building materials, something he puts down to our “relative geographic isolation”. However, he thinks the current building boom is changing the game.

“We’ve recently seen a notable shift towards the importation of products such as ceramic tiles, joinery fittings and sanitary-ware. More companies are entering the market too, leading to greater choice and diversification. This hasn’t led to a hugely competitive environment just yet, but that will follow as the market slows down,” he says.

Similarly managing director of Auckland-based quantity surveyors Emmitt Consultants, Nigel Emmitt, believes the market is a duopoly. He thinks this is a cause of the increase in material costs he has seen across the board.

“I don’t know for sure. I have opinions, but they are only opinions. [I think] we are limited with the number of suppliers of materials in New Zealand. Since we have a bit of a duopoly on our materials in New Zealand [Fletchers and Carters], they move up the prices as they choose,” he says. “There have been increases in cost of materials. But it’s not the only cause of the increased [overall building] costs over the past few years… In the residential market we have seen a big increase in materials, labour and the margins on top of that due to the volume of work.”

On the other hand, in an interview with M2 last month, New Zealand architect Pete Bossley said we might be on the wrong path to affordable housing. “I think somebody has to explain why a sheet of plasterboard in this country costs a hell of a lot more than it costs in Australia, for example. When there’s no real reason, except the fact that people say, “well you’re a long way away”. But it’s bullshit. If we can get wine on the table from France cheaper than we can from a vineyard just down the road, I don’t see why they can’t do that for building materials. There’s got to be a supply chain making it difficult to get reasonable prices,” he says.

Bossley says the market is not as competitive as we would like to think, or that it might say it is. He used an example of one of the biggest gyprock companies in Europe that tried to get into the New Zealand market about three years ago. He says they were going to bring in cheaper plasterboard. They said to Bossley they were interested in the New Zealand market because people pay more. “[We pay] 50 percent more or 100 percent more for plasterboard in this country than anywhere else in the world.”

Over the past 25 years, the price of an average section in Auckland has increased tenfold, from $53,000 to $530,000, whereas the price of the building has increased by threefold, from $120,000 to $360,000.

The real question raised by Bossley is why we are paying so much when there is little competition. In fact, it could be argued there is a monopoly (or duopoly) around basic materials.

Consequently, building a home in New Zealand has become more expensive than other countries. Just across the ditch in Australia, it is estimated to be 30 percent cheaper. A TV3 3D investigation looked into “price rorting” in the building industry and discovered New Zealanders are paying more. Tony Sewell, head of Ngai Tahu Property, told them “we’d be paying around 30 percent more than in Australia, probably 60 percent more than the United States…and the United States’ product is better.” Mr Sewell told 3D, “we need to open up the New Zealand market to the international one… that will keep the competitive tension up and keep the pricing at the right level.” The report put this down to a multitude of reasons, including transport costs, population size and exclusive deals that exist between suppliers and hardware chains.

In a 2014 release, then Commerce Minister Craig Foss spoke about competition and the importance of it. “New Zealand is a small market for building materials. While we would prefer as much content as possible is locally manufactured, we need the competitive pressure of imported products to ensure we are getting best value for money,” Foss says. “It is through competition and choice for consumers that we keep costs down.

Kohn believes that since the minister’s comments, the market has become more competitive. “Competition in the market is intense. This acts as a brake on margin setting and means most supply chain executives would today reject that argument out of hand,” he says.

By operating free market principles, prices for goods and services are determined by the open market and consumers. The only markets that are price regulated are natural monopolies – electricity lines companies, gas pipeline businesses, etc. There are no guidelines for competitive markets, just laws (e.g. Commerce Act, Fair Trading Act).

This was exemplified with Fletchers, who have a significant share of the plasterboard market (The 3D investigation suggested this was as high as 94 percent). In 2014 the Commerce Commission was required to investigate Winstone Wallboards Limited (a subsidiary of Fletcher Building) due to complaints the company was acting ‘anti-competitively’ in order to maintain their market position. The Commerce Commission did not believe Winstone had breached the Commerce Act 1986. The Commission did acknowledge that Winstone’s market share is “very high and has been for many years”. They also stated that it was outside the commissions “functions and powers to inquire into these market features”.

The report also stated: “[the high market share] does not, however, appear to be driven by exclusive agreements with merchants, rebates offered to merchants or builders, or an anti-competitive predatory strategy. Rather, as well as entrants not making sufficiently attractive offers to merchants to induce them to stock their product or for builders to request supply, it appears that Building Code compliance, combined with the preferences of those involved in designing, consenting and building houses, contribute to Winstone’s continued high market share.”

In the investigation Commission Chairman, Dr Mark Berry, also noted the importance of such investigations: “while plasterboard only accounts for between 1% and 3% of the cost of building a new home in New Zealand (excluding land), the construction industry is a very important part of the New Zealand economy.”

Whoever you speak to, whatever their role may be in the home building process, everyone will have their own opinions about the truth behind affordable housing. Whether they blame the cost of materials, land, duopolies, labour, shortages or greed (the list goes on), either way, the 2017 elections may very well be won or lost over this topic, as everyone of different opinions finds their leader.