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Fletcher Building boss says Labour's plan to build 100k houses is admirable but would require US 'strip model' approach

Posted in Property

By Gareth Vaughan

Fletcher Building CEO Mark Adamson says the Labour Party's idea of building 100,000 houses over 10 years to tackle housing affordability issues is admirable and is probably possible at the average price of NZ$300,000 suggested by the party's leader David Shearer.

However, Adamson says achieving it would require the type of "strip housing approach" common in the United States.

In response to questions from interest.co.nz in a conference call following Fletcher's half-year financial results, Adamson also said the New Zealand building materials trade distribution sector was the most competitive he'd ever seen, and he didn't believe Fletcher has anything to fear from a government inquiry into the construction sector that's aimed at identifying barriers to improving housing affordability.

Asked about Labour's plan Adamson admitted to not knowing the specific details.

"But it is an admirable target, to build 100,000 houses," Adamson said.

"I think in terms of the house itself,  it would probably be possible to build them for the sort of prices they've talked about, depending on the sort of specification. But it would require a more uniform approach to building houses rather than this bespoke model that we seem to have here in New Zealand. You would have to have more of a strip housing approach (or a more standardised approach to house-building in general), that I see in the rest of the world, particularly the US."

"And the big $60 million question is where they're going to build them. It's unlikely they'll build them for $300,000 in Remuera," Adamson added.

In terms of housing affordability generally he said both sides of the political spectrum recognised the real need for something to be done.

"I think they have solutions to it. We're working with both sides, both Labour and the incumbent government."

Adamson is a Brit who previously ran Fletcher's laminates and panels unit out of Cincinnati, Ohio. He succeeded Jonathan Ling as CEO last year. The building materials manufacturer and distributor's businesses and products include Fletcher Construction, Formica, PlaceMakers, Pink Batts, Winstone Wallboards, Golden Bay Cement, and Gerard Roofs.

Govt inquiry 'will use facts and data to arrive at fair conclusions'

As part of its response to the Productivity Commission's report on housing affordability last year, the government has launched what it calls a "market level inquiry" into the construction sector. It's aimed at identifying "market level barriers" to improved housing affordability. Finance minister Bill English expects to receive a paper from officials on this mid-year.

"In terms of the inquiry that was launched a couple of months ago by Bill English, we are fully on board with that and cooperating," Adamson said. "To be specific, we don't necessarily fear the outcome. I think the government's rational and will use facts and data to arrive at fair conclusions."

"We don't believe, without pre-judging that, (it) will give us any undue cause for concern, although we always like to continue to compete."

In terms of the trade distribution sector, he said as someone who wasn't a kiwi, and had only been in New Zealand "five minutes", he'd never seen a more competitive market.

"I've never seen such a competitive and overly populated and concentrated distribution network in my life. Every corner I turn I see a PlaceMakers, a Bunnings, a Mitre 10 and all the other usual suspects," Adamson said.

"We have 19%  marketshare in  trade distribution. Last time I looked that didn't look like particularly aggressive or monopolistic or even duopolistic share. And  in that particular business we've seen margins erode, because of really aggressive price competition, by 2%.

"So not that I would wish for duopolies or monopolies, but I certainly don't feel that (Fletcher has excessive market power) sitting here in this chair and nor do the guys I've got running that  business," Adamson added.

Ling, Adamson's predecessor, told interest.co.nz a year ago that Fletcher was feeling the pinch from the strong New Zealand and Australian dollars, which were giving rivals a 40% competitiveness boost through imports.

'Anecdotal evidence of big building materials companies with excessive market power' - English

In January English told Radio NZ there was "plenty of anecdotal evidence" that large building materials players exert excessive market power, and were "jacking up prices one way or another." However, he added that it wasn't obvious that there was anything going on that breaks the law.

Last year's Productivity Commission report on housing affordability said the cost of building materials comprised about half the price of all residential construction costs and rose about 19% in real terms on standard homes between 2002 and 2011.

The Productivity Commission's report noted trade prices for a series of building materials in New Zealand were significantly more expensive than in Australia, with the Australian price as a percentage of the New Zealand price put at 76%. The Productivity Commission said New Zealand had a number of different characteristics to Australia that impact on the price of materials. These include a small and dispersed population with relatively low demand for construction services and building materials making it harder to generate economies of scale.

Labour's Shearer, meanwhile, says the NZ$300,000 price per house Labour refers to means terraced houses, apartments and compact houses, of about 130 square metres in size. He says building 100,000 houses at an average cost of about NZ$300,000 each is plausible because building new homes on the scale of 10,000 a year, which Labour proposes, would bring costs down by about 30% to 40%. Labour wants to build 100,000 affordable houses over 10 years principally to enable first home buyers to "get a foot on the ladder" given home ownership is "part of the kiwi dream," Shearer says, adding it would also stimulate the economy and create jobs.

An annual international study comparing 337 urban markets, released last month by Demographia, showed in parts of central Auckland the median multiple, or the house-price-to-income multiple, is well over seven times. Auckland's North Shore has almost reached seven times. In Manukau it has reached six times, and in Waitakere it's 5.5 times. Demographia says housing is "affordable" when it can be purchased for less than three times annual household incomes. It is "moderately unaffordable" at between three and four times household incomes, is "seriously unaffordable" between four and five times household incomes, and "severely unaffordable" above five times annual household incomes. See the full story on this here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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28 Comments

Check this out :  It could

Check this out :  It could be possible to buy a 3 bed home in Auckland for $375 per week if our dozy politicians thought outside the square 
With all the will of God ,the Govt cannot  build $300k new houses in Auckland , but there is a PlanB that could work if council made leasehold land available on 99 YEAR LEASES .
The Annual Land rent could be say 3,5% (Govt borrowing costs )of the cap value of a $200k section , ( the rent would be about $135 per week) .
Young folk (18 to 30) can put 3 BEDROOMED NEW relocatable homes on the leasehold land ( The relocatable would cost about $240 PER WEEK AT 5% )
All up , you buy your home for $375per week. 
The land would be greenfield land South and South east of Auckland
To prevent fraud , the land would have to be occupied by the lesee , no Investors or rent speculators , if you vacate you lose your leasehold rights  and the land is re-let to the next family

And who pays for the

And who pays for the infrastructure cost of building roads, sewerage schemes water etc?
And don't forget the on-going costs of the maintenance of the infrastructure.
And don't forget the RMA costings to such a project or would that too be written off to the other ratepayers?
And all other landowners who pay rates will be subsidising the Council owned land that past rate takes have funded as this proposal keeps the lease costs set for 99 years.
 
 

YOU PAY IT! And all the other

YOU PAY IT! And all the other people who have been taking advantage (read ripping Aucklanders off) of the house and land shortage in Auckland... I love it Boatman! Boatman for Lord Mayor of Orkland!

Most ppl id suggest are

Most ppl id suggest are simply ppl like myself who have bought a home...nothing to do with rip offs.  Now you say its Ok the ppl already bought can pay for my house because I cannot. Sorry but while I think there should be socially provided housing I dont see why it goes beyond below market rents in state provided housing, for very low incomes, above that if you dont earn enough to buy a house you rent.
Now sure there are the un-profesional landlords who give the sector a bad name but really most ive met are just ordainary ppl trying to make a living.
regards
 

General HubHub - perhaps you

General HubHub - perhaps you should consider that some people actually got offf their proverbials and worked hard and went without things to get ahead. Obviously from your statement above you think these people have taken some kind of advantage - well yes they did take advantage - and that is they used their brain, intellect and braun to get ahead under their own esteem. Advantages can be through honest endeavours.
 
On the issue of Aucklands housing affordability - only small parts of the equation are presented in the media. If people are stretched financially to some kind of breaking point then wouldn't mortgagee sales figures be considerably higher than what they are?
 
If people genuinely want to purchase a house but can't afford too maybe they have to take some personal action so they can afford to buy.
 
If you always do what you have always done - then you will always get what you have always got!
 
If there are distortions in the market from rediculous legislation and policies get rid of the distortions and you get rid of the effects.
If the young people in Auckland can't afford a house - maybe they should consider how they are spending their money, as the media shows large numbers of young people filling the streets with drunken behaviour, looks like many of the young people like to waste their money on their social habits and then whinge hard-up with their hands-out for help.  Who's taking advantage of WHO?
 
 
 
 
 

Just factory-build them

Just factory-build them all.
 
Existing players like Lockwood and Fraemohs can deliver 97 sqm houses for well under $100K.  Add foundation $15K PC allowance, some landscaping (same) and a cheap garage (same) and there's a starter kit for say around $150K give or take.
 
Tell me it ain't so....

Ive seen a 10 years old

Ive seen a 10 years old (would would now be a 100k) lockwood...I'd wonder on how long it would last, however knocking out thousands would bring that cost down a lot....so up the quality a bit and all's square.  I would wonder on the modern ghetto aspect mind.
Of course the ones screaming the loudest to do that would be the land bankers....probably be able to delay compulsory land purchases for a few years in the courts thus making it un-workable.
regards

What happens at the end of

What happens at the end of the 99 year lease?
Icertainly don't want to be living in a relocable home surrounded by other relocatable homes.
Sounds like a trailer home park to me.

99 years lease isn't a new

99 years lease isn't a new idea.  The bulk of public housing in Singapore is on 99 years lease since the 70's, even now new lands released by their govt to private developers are on 99 yrs lease. 
I guess at the end of 99 years, it won't be you handing the key back to the Govt - by then your children would have moved onto bigger and better things.  But after a while people will get use to the idea

Yes,but grown adults weak and

Yes,but grown adults weak and stupid enough to submit to being caned, deserve no better than signing up to a 99 year lease. Darwinism at its best.

Absolutely right on the

Absolutely right on the button.  My father had one in Foxton Beach and it was exactly the scenario you are painting. 

Most of London housing is on

Most of London housing is on 99 year leases. In the UK, you have the guaranteed right to renewal, ground rent cost  control and the right to purchase the freehold title. Something similar here would fix the issues you refer to.

Bingo!

Bingo!

there's clearly a solution

there's clearly a solution here, but it won't come purely form the market, all is required is some willingness for intervention, a bit of brainpower and political will...
Voila! The housing affordability issue is addressed, and the economy gets a significant boost over a prolonged period
Not rocket science
 

ummm Matt, I think you'll

ummm Matt, I think you'll find if it isn't rocket science, it like can't be done, m'kay!

As someone who is currently

As someone who is currently renting a 3-story, 3brm terrace in a row of identical ones, I can confirm that this is not a bad way to live at all, and I would have no hesitation in signing up to buy one. It's all new, well-built with weatherboards and double glazing, and has a garage, deck and small backyard. It's close to the CBD, and living close to neighbours hasn't proven to be an issue at all. I have previously lived in an apartment and found it much less human-scale if that makes any sense. Millions of Brits and Europeans live in terraced housing; it's space efficient and cheap to build.
 
Only catch is that they sell for $500K!!! and as such are full of young professionals. If you had some social housing with all-night gang parties in this block it would not work at all. So which ever government actually builds these things must be careful not to blur the social goals- these should be owner-occupied only, not given to beneficiaries.
 
Kiwibuild definitely wins my vote though. If I can avoid a lifetime of interest-only payments to Australian banks I think that's a good thing...
 
 
 
 

"I've never seen such a

"I've never seen such a competitive and overly populated and concentrated distribution network in my life. 
Fletchers are a highly vertically integrated company and as such will concentrate it's profit at the core of the production/supply system.  The sales and distribution segments are typically cutthroat and when you control the whole chain you leave very little margin for the last link because compedition will cut that margin to the bone.  I.e if you give them a reasonable margin the will give it away in the pursuit of competition.  Another example of this is the oil industry.  They are not really interested in owning or running service stations and pricing is such that retail sales are barely profitable.  The profit is greater as you move back up the industry supply chain to the point of owning the oil wells where a great deal of the profit is made.
Accordingly Mr Adamson's statement, while true, is only a small part of the whole picture and gives entirely the wrong impression.

Adamson says achieving it

Adamson says achieving it would require the type of "strip housing approach"
A ha ha ha ha. As opposed to the NZ predesigned, leaky carbon copy houses that take 20+ years to resolve?
At least US builds have proper insulation, decent central heating/cooling systems appropriate to the regional climate as standard. Also many areas in the US appear to be strip housing from a distance owing to the fact they must have the same coloured roofing tile to blend in with the environment. Looks rather good in the more scenic areas.

Zoning changes for Auckland

Zoning changes for Auckland intensification indicated here
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1086...

Still think all of Res 6a and

Still think all of Res 6a and Res 5 should be changed to 300m2 but difficult to tell what they are doing as the article talks of 500m2 minimum lot size for some areas and 300m2 for others without saying where these are. Shoud also only require 1 car park per dwelling. Will be interesting to see the full detail - perhaps an interest.co.nz reporter could investigate and run a story on this unitary plan.

The preliminary spacial

The preliminary spacial planning work from a few years back http://www.itsmybackyard.co.nz/resources/default.asp indicated that much of the current Res 6 and 5 zoning would be upzoned, so presumably there would just be pockets of the 1/500sqm 'single house traditional site' zone and the new zoning maps would follow this work?
 
What will be interesting is how they catoragize new higher density zoning. If higher density is a Discretionary Activity then it will simply not happen as there are very few people rich or foolish enough to risk notification.
 
No matter how they zone the city in reality density will only increase if Resource Consents can be obtained as Permitted, Controlled or very Restricted Discretionary activities.
 
 

Agreed.  There's a phrase

Agreed.  There's a phrase running around Christchurch at the moment - the CCC Building Prevention Team...it's a good one to drop in on these sorts of discussions. 
 
I rail, at every possible opportunity, against the adversarial nature of consent etc processes.  It causes massive costs as the opposing teams consult their expensive Consultants and Legal Eagles,  introduces time=money delays into the loop (especially where capital is already committed), and adds little value beside ticking boxes and tweaking exterior decorations.  And of course several such cycles seem to occur before honour is satisfied and one or other party to the schemozzle calls it off.
 
But you are quite correct - rational actors avoid this sort of carry-on to begin with.
 
Here in Chch, the tourit head honcho is traipsing off to Malaysia to get 'international capital' for that proven money-spinner - Hotels!
 
The locals are, unaccountably, not interested in putting skin in the game.
 
Wonder why?

The numbers ourtlined within

The numbers ourtlined within the above article are a million miles off affordable.
Just read HOUSTON: WE HAVE A HOUSING AFFORDABILITY PROBLEM, to get a sensde of true market pricing in a normal and affordable housing market. And adjust the numbers to New Zealand currency ...
 
http://www.interest.co.nz/news/49029/opinion-houston-we-have-housing-affordability-problem

Quite why some are looking to the severely unaffordable housing markets of Australia for guidance and ignoring the "nuts and bolts" pricing of the normal and affordable housing markets of North America, is something of a mystery.
 
Surely ... it should have "registered" by now, following 9 Annual Demographia International Housing Affordability Surveys, that to rate as affordable, housing markets must be at or below 3 time annual household incomes.
 
There is a clear and easily understood Definition of an affordable housing market, incorporated within this years Survey ...
 
 
http://www.demographia.com/dhi.pdf

It has been up on the front page of the Performance Urban Planning website as well for years now ...
 
 
http://www.performanceurbanplanning.org/

3 should not be that complex a number to understand. The people at Fletchers should try a little harder.
 
Hugh Pavletich
 
 
 

No doubt all the know alls

No doubt all the know alls associated with housing are purchasing copies of the North American Construction Cost Handbook RS Mean ... the counterpart to our Rawlinsons here in New Zealand ...
 
http://rsmeans.reedconstructiondata.com/
Then adjusting the numbers downwards by taking the "top down" approach from real market examples, as we do with the Rawlinsons here in New Zealand.
Asking the question - why are they getting starter stock in place of the affordable US markets for $US600 through $US700 per square metre ALL UP - when it is a stratospheric $NZ2,500 ALL UP and beyond on the fringes of Christchurch ... $NZ3,500 ALL UP and beyond on the fringes of Auckland.
 
Just "follow the detailed numbers" to identify the problems and solutions.
 
This all should have happeneed years ago of course ...
 
Hugh Pavletich