Opinion: Reactions of construction industry participants demonstrate the long road ahead in producing cheap houses

By David Hargreaves

Affordable housing. Everybody professes to want it. But who wants to build it?

While politicians glibly talk about housing the people of New Zealand in new, cheap and cheerful residences that won't tear bank accounts to shreds, the key thing that's easy to overlook is the attitude of the construction industry itself.

Therefore the latest Ministry of Business, Innovation and Employment (MBIE) report on the construction sector provides some thought-provoking reading. 

Tucked among 148 pages of factoids, graphs, charts and dense information, are direct, anonymous, comments from industry participants.

And the remarks about affordable housing (on page 105) are illuminating, to say the least.

Take this comment from "an architect", who said they didn't know of any architects seriously involved in low cost housing "and the reason is simply economics".

"There was a road show on housing affordability about two years ago…It was unmistakable that there was not just a lack of interest but a rudely sort of negative vibe in the whole place," the architect said.

"...First of all they denied there was a problem…and the second main thing was ‘You academics don’t understand. We run a business and I employ five people and I’ve got to keep them busy and I’ve got to pay their wages and if I do an affordable house it will take me the exact amount of time and effort on a low cost house and since we get paid by a percentage, if the house is $300K we get the same percentage if (it is) $600K.

"Twice as much income for the same amount of work’. In fact one said ‘I never accept any commission for a house under a million dollars."

Then there is the "chief executive of a building firm" who said that their main driver was providing return for shareholders "and we don’t build low cost, affordable homes because they are unprofitable".

Then there's another architect: "Why would a builder who does three houses a year build a couple of low cost houses? Spend equal amount of time at it...There could be a profit, a modest profit. But it’s too modest and too risky."

And finally, an "industry leader": "The thing that constantly surprises me is the small margins that builders work on. If you take the residential sector…the small builder sometimes takes no margin on his sub-trades and in addition can grossly underestimate the time required…they don’t add a lot of risk margin, so if anything goes wrong the profit they’ve got on the job is gone almost in an instant."

There is no conclusion drawn from these comments. But the fact they are included is clearly seen as significant by those who pulled the report together. The big unanswered question in the report, therefore appears to be: how do you produce affordable houses if there is marked reluctance on the part of the construction industry itself to build them?

Maybe we can have another report later.

As for the rest of the report, the MBIE's construction report is part of a series, "The New Zealand Sectors Reports" and one of seven publications that provide a "factual source of information in an accessible format" on the key sectors making up the New Zealand economy. 

The objective section of the report says that it is not intended for the report to draw policy conclusions.

"Its aim is to provide a comprehensive report card on the state of New Zealand’s construction sector for business people, exporters, policy makers, media commentators, economists, academics, students and anyone with an interest in New Zealand’s economic development," the report says. 

Here are some of the interesting facts and figures as highlighted in the report:

• The construction sector is the fifth largest sector in the New Zealand economy. It employs over 170,000 people, 7.6% of the workforce. In 2010 it generated 6.3% of GDP (nominal).
• Despite the GFC and the associated downturn in construction activity, the sector employs 36,000 more workers today than in 2002, a 30% increase.
• The sector is a key driver of economic growth. Production from the sector accounts for around 45–50% of gross fixed capital formation in the economy annually, providing basic infrastructure, housing and commercial, industrial and public buildings.
• Inputs to the sector come from a wide range of other industries and professions, including mining, wood processing, manufacture of materials and fittings, banking and finance, lawyers, accountants, engineers and architects. - The construction workforce itself covers a wide range of skill levels, from labourers and tradespeople to project managers and engineers.
• Construction is a highly diverse sector. The sub-sectors that make up construction have very different characteristics.
• Residential and non-residential building together employ 44,000 workers, close to half of whom are self-employed.
• Residential building is mainly made-up of self-employed builders or small building firms that typically build two to three houses a year, as well as a range of alteration and repair work.
• Non-residential building firms tend to be larger in size to accommodate scale projects such as offices and industrial buildings.

As for "challenges" facing the construction sector, the report says there are some "well-documented" ones, which are "the subject of a significant amount of work by both the sector and government, such as the work of the Building and Construction Productivity Partnership". The challenges include:

• Productivity growth has generally been below that for the economy as a whole. For every hour worked in the sector, $34 of GDP is generated (2010). This is significantly below the all-sector labour productivity average of $48 per hour worked.
• The sector experiences the highs and lows of the business cycle more acutely than the economy as a whole. In times of high demand there are bottlenecks with the supply of trained and skilled labour, with immigration often filling the gaps.
• During a downturn, experienced and skilled labour is often lost to the industry. In addition, the high volatility appears to be a disincentive to firms investing in training and in capital equipment.
• The greatest challenge is the unprecedented workload that will be placed on the industry in the next few years, driven by the Canterbury rebuild, the demand in Auckland for housing and infrastructure investment, and the weather-tightness remedial work. Industry identified concerns both over its capacity to meet the demand and maintain quality during the peak, and the risk to the viability of firms once the peak has passed.