Chris Parker points out even with consents issued and SHAs designated, other challenges may intervene to limit how many new houses Auckland actually gets

This article was first published on AUT's Briefing Papers series. It is here with permission.

By Chris Parker*

There are a number of challenges facing the building industry in Auckland, around scale, quality, efficiency and price.

Scaling up the building sector raises questions: What are the crowd-out risks for other sectors in Auckland, as the building sector tries to outbid them for labour and materials? How can public policy better support industry to meet various sectors’ needs?

Policy makers have a number of initiatives to help gear up industry for major expansion, including:

  • the ‘Building and Construction Productivity Partnership’ (since ceased)
  • MBIE’s ‘National construction pipeline’ (latest issue was July 2015)
  • Workforce skills roadmap for Auckland construction’ to support skills sector growth.

Recent analysis commissioned by the Council suggests house prices are high because of anticipation of redevelopment opportunities enabled by the Proposed Unitary Plan once it becomes operative.

Builders and tradespeople may move from Christchurch to Auckland as the rebuild ramps down, but capacity challenges will remain.

Productivity

There has been little, if any, measured productivity growth in New Zealand’s construction industry for over 30 years. (One problem is measuring the quality improvements that result from productivity growth.)

The cost (excluding land) to build the average 200m2 house is not far off $400,000 — about five multiples of Auckland’s median household annual income (of approximately $80,000). Contrast this with the ideal ratio of three to one, including land.

The Productivity Commission in its 2012 Housing Affordability inquiry attributes low productivity growth performance in the residential construction industry to:

  • structure:
    • the industry’s small scale and lack of scale economies
    • fragmented industry structure requiring a myriad of subcontractors and informal contracting
    • skills issues
  • conduct:
    • low levels of innovation
    • ‘bespoke’ (tailored) nature of our homes
    • inferior management skills and practice (e.g. project management)
    • councils (as building consent authorities) being excessively risk averse and stymieing innovation in design, materials and construction techniques.

Poor retention and attraction of workers

New Zealand has an issue with attracting and retaining builders and tradespeople internationally, as the figure below shows:

graph-16

Builders advise that this is caused not by barriers to entry, but because it is an unattractive field to be in this country these days:

  • low wages — from low productivity
  • punitive liability rules — 10-year personal liability and joint and several (rather than proportional) liability
  • too little initiative afforded to builders — building inspectors do not afford builders with much leeway to use initiative and deviate from plans because of concerns about quality assurance.Poor project management and quality assurance

Work that I co-led last year for the Productivity Partnership found that project management was:

  • generally poor (but with pockets of excellence)
  • not seen by builders as being particularly useful
  • desired by buyers, but they didn’t really know how to express their demand for it.

Project managing a house build is tough: some 20–25 subbies are required each build (with a high level of specialisation of trades), plus multiple visits from building inspectors.

Better project management can reduce the risk of the highly networked sector coming to a slow grind during peak demand periods. Also if project management is poor, then don’t hold out much hope that quality assurance management processes will be any better. (Builders will often default to ‘if you want a job done properly, then do it yourself’.)

Auckland Council building control staff struggle with significant industry quality issues, with 25%–40% of all building inspections failing. A council’s role ought to be limited to compliance (e.g. auditing quality assurance processes), but inspectors often find that quality assurance isn’t being done at all.

So councils fill the vacuum. That’s because they are liable for potentially all the harm caused by others (because of the government’s joint and several liability rule) and because they have a legally defined ‘duty of care’ to consumers. So they effectively start micromanaging builders, which in turn repels builders.

Move to proportional liability

The government needs to think more carefully about replacing the ‘joint and several liability’ rule with ‘proportional liability’ (like Australia). People and organisations including councils should be liable only for the losses they contribute, not for losses out of all proportion to what they caused. At the moment building firms are incentivised by the joint and several rule to be extremely small for two reasons. One, so that they can personally supervise build quality (rather than delegate). The other, so they can disappear from plaintiffs, and liquidate (or ring-fence assets) so that they are not left carrying all the liability caused by other people.

This change would reduce the incentives for firms to be extremely small, and will help them to achieve efficiencies of scope (i.e. different trades and skills in-house) and scale (i.e. more work). Larger firms can support more management overheads to undertake project management, quality assurance, and investment in staff. Inspectors would likely cut builders some more slack, which will improve efficiencies and help address key issues about attracting and retaining staff in the industry.

The Productivity Commission raised their concerns that current liability rules exacerbate the cottage industry structure, and thus its conduct and poor performance in its 2012 housing affordability inquiry. It asked the Law Commission to consider the impact on industry structure, conduct, and performance when advising the government on whether to keep or change the ‘joint and several liability’ rule. The Law Commission didn’t. So the advice to retain the rule that the government has received is incomplete.

Other changes needed

Other opportunities for improvement and continued development include:

  • supporting large scale residential development
  • investment in new production technologies, such as offsite prefabrication and Building Information Modelling (BIM)
  • opening up new supply chains to mitigate any market power in the current industry (such as importing material from the USA)
  • developing new avenues for product approval as per the Building Code, including adopting overseas product testing
  • creating new housing typologies and design formats (e.g. modular housing and attached dwellings, which may also bring non-residential construction (i.e. commercial) techniques into the residential sector)
  • developing new effective project management approaches and quality assurance
  • developing new processes for building compliance, including private accreditation systems and private sector insurance to help protect consumers from risk
  • supporting skills training (both new recruits/apprentices and more senior skills such as project management, business management etc).

I am also sounding out interest from other local/central government departments to co-commission analysis to assess:

  • where will the resources be drawn from, and which industries might be at risk of crowd-out from an expanding construction industry[1]
  • what support those industries may need for Auckland’s longer term prosperity
  • where emphasis should be placed on improving the quality of construction sector regulation.

Outlook

There has been a lot of focus on how land use regulation affects Auckland’s house prices. But that may be largely overcome once Auckland Council’s Proposed Unitary Plan is updated and becomes operative, possibly by late 2016.

Challenges in the residential construction sector, though, will need to be addressed if housing supply is to increase fast enough to meet demand.


[1]      This may involve CGE (computable general equilibrium) modelling. The work could also build upon the following publication: Department of Labour (2011) Labour Market Adjustment in the Construction Industry, 2001–2009


Chris Parker is Chief Economist at Auckland Council. Prior to joining the council at the beginning of the year he was a consultant. Chris specialises in economic appraisal of policy, regulation and investments. He has undertaken industry studies in residential construction, civil construction, and he specialises in cost-benefit analysis of major infrastructure projects that change the evolution of cities. This article was first published on AUT's Briefing Papers series. It is here with permission.

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25 Comments

200 sqm! I have only ever lived in houses around half this size and Im not poor. Incentives are needed for the building sector to produce 100 sqm houses on a compact 400 sqm section. They dont do it because theres no money in it for them

Incentives? so Govn pays them? Why not legislate that houses cannot be over 150sqM? what then if you have 6 children? and look after grandparents?

Incentives could just be less rules governing smaller houses. Less rules = lower compliance cost

Another factor is the boom/bust nature of NZ's housing market.

The restrictions on new supply from planning constraints mean that, firstly, the bottom half of the new build market drops out. So only big houses on small sections for wealthy people are profitable to build.

Secondly, there is a price boom and mini construction boom. But eventually property prices rise too high and prices plateau or drop back (but never to the original prices pre boom). But the construction boom really busts big time.

Construction firms go bankrupt. A generation of building skills and knowledge is lost. Entrepreneurs in the construction sector learn it is better to stay small, not to over invest in skills, equipment and processes reliant on ongoing sales because that places the firm at risk when the bust comes. (An alternative strategy which is seen in Britain is that the building industry forms cartels around property development firms that have a pipeline (expensive) through the planning processes to guarantee at least some buildable land).

NZ's boom/bust housing market has similarities to Britain's. If you look at the house price graph in the following article you will see Britain has had three ratcheting up booms and busts in house prices since 1970 while Germany has had none.

http://www.macrobusiness.com.au/2011/06/how-germany-achieved-stable-affo...

Why not get rid of the building consent process altogether for one and two story houses of standard construction (just have planning consent). I doubt it would cause a significant safety issue but I think it would make building significantly cheaper. We don't have the government or council checking the quality of anything else we buy, why do we need it with housing? I get the feeling we pay significantly more for a new house just for an almost useless 'guarantee' from the council.

Yes, yes, yes!

The perfect example is Christchurch. Around 2/3rds of houses were effectively unconsented by modern standards (too old, done pre 1990's, etc) yet none , NONE failed in our earthquake series in such a way as to kill their occupants (once exogenous forces like rockfalls, and of course, old URM, are excluded).

So for say a 150 squares, wooden frame, light roof deal, chuck it into Schedule 1, Building Act 2004, and be done with all of the hoo-ha and expense.

T'will nevah happen, of course. Too many troughers to feed....

Yeah we allow 100's of lives a year to be lost on the roads without that much red tape, yet with houses we apply layer after layer of red tape for no real reason

um, no you cannot build your own car and legally run it on the road. You need things like automotive engineer's report etc to say it is safe to do so.

Last time I looked I wasn't driving my house around town.......but if I do put it on wheels apparently I don't need consent.....

When my French family arrived at Akaroa the first business was getting some houses built - they arrived in the August and the Compte de Paris's ship log informs us that they were all housed soon after........and yes they surveyed first!!

The point of my reply was, there are regulations to be met on many things and they are considered essential for safety.

Look people survived absolutely fine without all these regulations in the past !!

The only reason all these regulations are there is because of a Treasury paper which worked out how much all these regulations would add to GDP!! It has nothing to do with safety and all to do with increasing the costs associated with a project.

The old houses were however consented to the standards of the day when they were built. Did they fare worse in the earthquake? they probably did, that doesnt mean they collapsed just suffered a degree more of damage.

PS. Bearing in mind they were designed to stay up in say a magnitude 7.0 and we only had (say) a 6.0 no house should have collapsed.

Don't go getting hung up on the magnitude......it is the PGA peak ground acceleration and the last 3 quakes were right under the city and shallow......

that is moot as whatever criteris you wish to use its is teh same measure for all the buildings. At the same time there will be a mixture of buildings of different ages in the same area. So my comment/Q is is there a noticeable difference in amount of damage depending on age.

The land is far from being the same underneath each building!

There are plenty of instances where neighbouring newly constructed types suffered severe damage while old ones survived and vice versa.

God you are utterly clueless, I never said it was the same land, it obviously isnt. My point is to determine such things as these variables and allow for them to see if the newer tougher regulations are of real benefit, or not. ie are newer houses really safer ie a return on the extra costs, if not then the regulations can be relaxed, if they do show benefits then they are worthwhile.

I am unclear what you mean here. ie a building consent and a planning consent seem to either be the same thing or overlap so much that the difference is moot. Un-fortunately we have building consents to prove the building has been built to the expected standard(s) and no I odnt think we should do away with them.

Yes we do have the Govn checking what else we buy, cars for one go through a WOF. (edit also personal car imports get checked for compliance or can never be used on a NZ road) Pharmaceuticals would seem to be checked also?

Building consent is issued under the Building Act - it's about managing construction quality. Planning consent is issued under the Resource Management Act - it's about managing the effects of the building on the receiving/surrounding environment.

I do believe Nick Smith has talked about merging such management for urban residential building into a single act to reduce the bureaucratic burden of low rise, straight-forward residential building construction. Talk is cheap, however, and meantime building costs continue to escalate.

The costs are complex, everything from builders being charged far more for tools which flows through to added cost to effective monopolies on materials to over-priced land. Wasnt Paula Bennett? having a "get rid of red tape" task force? where did that go?

Ah yes, 6 months ago, https://www.beehive.govt.nz/release/taskforce-cut-red-tape-announced

While there is too much red tape, I would not get rid of it all.
Why? Because there is no way I trust a builder (or developer) not to cut all corners and save costs where they can.
As a non-expert, I expect them to meet the specs and prove they have instead of not just saying they have.

Having said that, the developer will sell the house for as much as they can, regardless of how much less it costs to build it. Having no consents and reduced cost does not equal a reduced sell price.

Totally agree.

Y'all need to read the BA 2004. Schedule 1, Part 1, clause 2: the test is perfectly clear.

2 Territorial and regional authority discretionary exemptions
Any building work in respect of which the territorial authority or regional authority considers that a building consent is not necessary for the purposes of this Act because the authority considers that—
(a) the completed building work is likely to comply with the building code; or
(b) if the completed building work does not comply with the building code, it is unlikely to endanger people or any building, whether on the same land or on other property.

In Christchurch, old, unconsented wooden structures were amongst the safest places to be, compared to:
- shops with unattached masonry parapets
- load-bearing URM (especially lime-mortared)
- mid-century column-and-plate concrete commercial structures ((both the CTV and the PGG buildings...)

And as for the 'standards', well, factory-built construction is used for caravans, boats, aircraft, cars, and some but not nearly enough Buildings. The cottage industry, staffed by nest-feathering principals and drug-addled labourers, is hardly gonna get a look in if Schedule 1 gets expanded.

And about bloody time.

Get bums out of offices and back into the real work force and then most of the issues will float away. There are far too many economists and others sitting around adding absolutely nothing of value to the economy and the rest of the working populace is having to be even more productive to take up the slack.....get all the useless Labour dpt people out of the offices while your at it and throw them some real tools......this so-called educated economy is slaughtering productivity and funny how no economists ever write about or recognise this!!

Most of this article is a straight out attack and slang off at builders.......I suggest that this economist actually gets out of his office and goes work on a building site for 6 months and see what actually happens before slinging off an industry as unproductive with poor project managements skills.....the fact is builders are generally working for clients who have individual needs and these needs often change as a job progresses......builders would be stupid not to keep their clients happy.........people want bespoke they want creativity and innovation....most people do not want the same as everyone else........and that is where economists struggle because they try to pigeon hole everyone to fit a model that they can then predict outcomes which is just plain stupid.....

NZ needs to have a working bee mentality.....all hands on deck.....that means all those lazy, procrastinating, key tapping, tyre kicking, coffee supping people need to stop trying to write and supervise process and actually get their hands dirty and start a real job......and maybe there will be less of you then jamming up the health care system from sedentary lifestyles later on in life!

What is an economists hourly rate!! What is the average Council workers average hourly rate? Go the whole hog and what are the hourly rates paid of all people who are not employed directly in business.......Compare these to a builders hourly rate.......and there's you problem! Too many overpaid under achieving people not producing anything!! I think the term is free loaders!!

" jamming up the health care system from sedentary lifestyles later on in life!" Met with a painter mate some months back, 55 and now unable to work as his joints are worn out from the repetitive nature of his work. Now looks forward to 10 years unable to earn much until retirement, where he wont have much.

ergo you have some opinions that simply dont stack up in the real world with evidence.

We need to get a legal framework in place to permit computer modeled 3D printed houses. We have the technology to custom print houses that match the topography perfectly. You can even build scaled down models that are accurate to 22 nm for clients to modify before they get the real thing. This way we can encourage the building industry as a whole to up skill and embrace new technology.
Most 3D printed houses overseas are printed using "concrete", but my rough back of the envelope approximations indicate that we could print with a carbon fiber + fiber glass + Kevlar + closed cell polyurethane (for structure + insulation ) and still produce houses cheaper than we do now and in less time. With the added bonus that these space age materials are lighter yet stronger than anything we build now (ie. less likely to collapse in an earthquake & in the event of a collapse less likely to cause serious injury).

http://www.stuff.co.nz/life-style/home-property/70675881/3D-printed-hous...