Tex Edwards cooks up a multi course recipe to improve housing affordability in New Zealand. With market failure more government involvement is required, he argues 

Photo by Fiona Goodall/Getty Images

By Tex Edwards*
(This article first ran on The Spinoff here and is republished with permission).

What is the problem with housing in New Zealand? Most young people, and families who intend to buy one during their lives see them as being too expensive and unaffordable. Housing supply, housing affordability, and housing quality are elephant-sized social problems impacting our core kiwi values.

But why did the cost of such a crucial lifestyle input run away on our community? Substantially lower interest rates (a consequence of global quantitative easing of monetary policy) as a response to the 2008 monetary crisis caused residential houses to become an investment asset for investors, who faced with getting -1% in bank deposits, started borrowing at 3% interest for assets which yielded 6%. The numbers don’t lie.

These investment dynamics turbo-charged an emerging asset class for baby boomers to invest in for retirement, thereby having investors crowd out entry level buyers. Also in the mix was a peculiar market structure comprised of the building industry, land zoning and taxing so when prices rose more supply failed to hit the market, thereby maintaining pricing.

When there is market failure, governments need to look to market structure, not innovation and new products – that is the confusion technique of incumbents who have the incentive to confuse and delay any government changes.

New Zealand needs new leadership in the industry to help solve these problems, and we need to change the way we talk about the issues. With any public policy problem (and housing is most definitely one), a large problem needs to be broken into several well-defined sub sets. For example, the housing crisis is not one mass problem its really about land supply, investment incentives, regulation, infrastructure and of course, construction costs (and skills).

The moment the building industry’s leadership delivers definitions and problem sub sets – and start setting performance benchmarks and targets – the crisis becomes a solvable challenge. Dissecting the issue means its an easier to find solutions, and hold diverse groups to account. 

Other commentators have canvassed the social problems caused by a broken property ladder, high property costs and the fact that rents are too high, but I’m primarily focused on solutions, economic analysis and international benchmarking.

We have to scale up

THIS PRE-CONSENTED AND PRE-FABRICATED HOME WAS BUILT IN A FACTORY IN MASTERTON.(SUPPLIED)

Industrialised building needs no introduction, and it’s a global best practice solution to improved quality at lower costs, using robots and assembly line techniques to build much of what contributes to the construction of a house.

Even though (as benchmarking illustrates) not all new factories are a success; like all modern technology and supply chain introductions, teething problems with industrialised residential building need to be solved. But about half of all houses in the UK are built by eight scalable building companies – should New Zealand look to a similar market structure? 

We need rapid adoption of large scalable industrialised building techniques, where one or two factories are built to deliver 5000 to 8000 houses a year per factory – this would bring a 10-year-old proven technology to New Zealand, and enables us to catch up with the new production techniques of the EU and USA. This is only possible with a Government contract, as its an industry change which needs scale to drive it.

Kiwibuild has to be the beginning of large, scalable contracts. We need a pipeline of house construction of more than 25,000 houses from new institutional operators who can build scale to challenge the status quo. This is where the Government acknowledge market failure and intervene in an industry; so more of Kiwibuild please. 

A review of permitting and regulatory standards needs to be executed by a new national body, specifically permitted to allow the industrial production of houses. Currently regulatory standards don’t encourage new building systems, and while in part this is protecting consumer interests – particularly after the leaking homes crisis – but in the end the leaky homes crisis has played into the hands of the incumbent building supply firms, preventing new building systems being introduced.

We need a break up

The F word in construction is Fletchers, this is a company which has market power and regularly pays rebates to large customers – a practice which is widely illegal internationally.

A Commerce Commission benchmarking market study needs to be initiated by the government into building materials in New Zealand. Why are eight of the core 15 building materials in New Zealand three times the international price? Why does one company have over 90% market share in a selection of important materials? Fletchers contacted customers recently about increasing the price of Gib plasterboard – really? It’s already 10 times the international price.

The terms of reference for the ComCom study must include a review of section 36 and section 27 of the Commerce Act, to see if weaknesses in this legislation created a lack of competition in building materials. A well-intentioned 2014 study by ComCom into plasterboard basically went nowhere, despite acknowledging there was a pricing and dominance problem. Building materials competition is not just about the price of those materials, its about competition in innovation (and productivity) associated with those materials. 

New Zealand has a unique dominance of one organisation in the provision of building materials – Fletchers – and although its construction division has incurred spectacular losses, the Fletcher building materials division has unique market power which inhibits innovation, price reduction and controls a cottage industry of builders.

It makes sense for Fletchers to maintain their dominance in building supplies; if a new supply chain opens almost definitely pricing will fall and therefore the golden egg of the Fletchers group, the building materials division will have falling profitability.

(DAVE ROWLAND/GETTY IMAGE)

We have to crunch the numbers

There’s not much point focusing entirely on the build side of housing when so much of the cost is tied up in land. I think we need a land commission which revisits the pricing, zoning and supply of land, with terms of reference including looking at the investment incentives to land bank re-zoned land.

We also need Treasury to take a closer look at the new asset class of “buy to rent” houses which is now a legitimate retirement savings asset. The scope of this study needs to internationally benchmark the New Zealand tax treatment of this form of retirement savings and understand the size, scope and format of this asset more formally. This study must include a detailed empirical analysis of the impact of allowing negative gearing on crowding out first-time buyers.

We also need a market benchmarking study by MBIE to better understand what international best practice is. Terms of reference for this study could include how land pricing can be brought down with zoning changes, negative gearing in home ownership, the status of the building materials industry and what is an aspirational best practice cost for an affordable home (minus the land)?

And to truly understand and calculate the value and opportunity, an economic benefits report to be prepared by treasury which delivers an economists’ commentary on the value of a change in the industry structure and achieving internationally benchmarked building costs. It could also consider the detail of changing the investment dynamics of this “buy to rent” culture of people saving for their retirement.

So now what?

Listening to the Minister of Housing Phil Twyford speak at a recent Auckland housing crisis event it was interesting to note he used the phrase “market failure” three times – this gives consumers and the industry prodigious confidence that change is on its way. 

What is the normal formula from central government in and industry change? A ministerial enquiry and select committee enquiry, MBIE review and international benchmarking exercise, Commerce Commission market study followed by a Treasury regulatory impact statement, lots of lobbying and eventually a new act, or a request for proposal issued with urgency to collect ideas and commence industry change.

AN ARCHITECT’S RENDERING OF MOA ROAD AND WALMER RD, PT CHEVALIER (HOUSING NEW ZEALAND)

Ministerial enquiries usually get swamped with lobbyists and status quo advisors who only look for incremental change, and blame the problem on other agencies.  I expect Fletchers will look to confuse, obfuscate and slow down industry change, all the while pitching to government “to help with affordable housing” and further assuring their materials are used.

We shouldn’t allow this to happen, and we need to demand faster action from this government. They could, rather than undertake a review:

  • Commit to policy settings of 25% of all new houses built or substantially built (0ver 75%) in factories by 2028
  • Commit to reduce building costs by 25% per square metre in entry level houses (our model shows that pricing in-building costs can be reduced by 42%)
  • A new tax treatment of development land
  • An active programme of international benchmarking

The Minister needs to mandate a series of studies, and benchmarking programmes within government agencies that are responsible for industrial matters, Commerce Commission, MBIE, Treasury, and a new language needs to be created in the industry around land, construction costs and investment dynamics. But most importantly – the minister urgently needs to deliver the Request for Proposals to private consortiums who are researching solutions.

The Government needs to deliver interim milestones, explaining what the New Zealand targets are specifically on land, construction costs and investment incentives – and who is responsible.

House prices in New Zealand will start to fall relative to incomes as industrialised production of housing is introduced, and new land and tax policies are introduced. It’s an exciting time to be in the construction industry in New Zealand, as a series of industry and market structure changes are initiated by a fresh approach from a new government.


*Tex Edwards was the founder of 2Degrees Mobile. He is now a London and Auckland-based company director who has been studying industrialised manufacture of houses in Europe, Asia, Africa and the US.

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53 Comments

The vested interests of a select few.

@Nzdan which "vested interests ' ?

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18

Solution.... Stop bringing in so many people! There all sorted.

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11

Oh my gosh, you questioned the "Growth growth growth" model we've been following forever!

You CAN'T DO THAT! It's not allowed!

Look increased immigration means increased GDP which means the government gets voted back in. Simple.

Which is why Labour is doing precisely nothing about this.

Policies 'lined up against the housing market'
https://www.oneroof.co.nz/news/34123/?ref=nzhhome

Here's the real problem. Mortgagee Sale - bargain for anyone looking to get into Remuera! https://www.trademe.co.nz/property/residential-property-for-sale/auction...

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10

A squillion and two dollaroos for a monolithic cladding crapshack in the coveted double chinese zone. This is indeed the problem.

Not to mention golden homes for $3 million in the back slapping capital.

A mortgagee in Remuera?! How could such a thing happen DGZ??? Could it be that property in your neck of the woods is extremely over valued?

CJ099, I'd prefer to use "overcooked and nonconsumable"

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10

First step in solving a problem is to accept that their is a problem (Unlike National who denied and instead for them was a sign of prosperity - as they were viewing it with their friends from the Ivory toewer) and the next step was to remove supporters of speculators and foreign buyer (If not why would national manipulate the defination of foreign buyer).

Now have to wait and watch if the current government will back off under pressure or change colours after getting power.

So essentially , you are saying that admitting that there was or is a problem is beside the point now , right ....!

Now that the problem is IDENTIFIED, and Well Blamed on National , and after 6+ months gauged and measured by the CoLs, what are the new heros, who Cried Wolf for so long, doing about it ? ...
They hardly seem to have a clue !!

Wait until the EQC disaster kicks in with a $500M+ out of left field and few other unforeseen expenditures and Workers' Strikes, then PT and Co will start singing as you have never heard them before about Kiwibuild.

The problem denial was much more palatable than this Unmatched Incompetence in solving it.

"The problem denial was much more palatable"……..forgive me, but finding that statement particularly difficult to swallow!

I'll assume it was said in jest.

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10

Denial caught up with the CoAL (coalition of actual losers). That's why they lost.

hmmm apologies in advance, i really try to not get too annoyed by this but i am sick of this COLs thing.
How can the Labour coalition can be labeled this when National campaign videos like this still exist.

http://www.newshub.co.nz/home/election/2017/09/national-leaders-awkwardl...

Wally BAHAHAHAHAHAHAHAH *splutters* BAHAHAHAHAHAHAHH

*cringe* *cringe* *cringe*

Bill English looks like a stripper in an American road side truck stop... going through the motions but completely dead behind the eyes. BAHAHAHA

This is going on my for_shame_list with Joyce/dildogate and Key/ponytail as the most undignified moments of NZ politics.

How many National items could be tagged #metoo?

Market distortions, global finance, punitive tax on all other investments, land undersupply, and bank lending.
Interest rates are much lower elsewhere with much less house hyperinflation so interest rates can’t be to blame.

All good, except the land policies have to come first as any saving you make in the likes of scale will be capitalized into the present restrictive land policies. No net gain will result except for the land owners.

It's not about scale per se, but more about flow, ie how one component part of a build seamlessly moves onto the next component part.

Land availability, consenting, development etc are components, and one of the greatest impediments to flow.

Ask most builders and they will tell you one of the biggest uncertainties they have is knowing the exact start date of any project.

As Tex points out, the majority of housing in the UK is already supplied by a few large builders, and yet the UK has very expensive housing and also the smallest new house size in the EU.

This is the most pertinent comment here. House prices are being driven by what people can afford to pay (as demand > supply). Instead of a $1m house being 700k land and $300k building, you'll just end up with $800k land and $200k building as the buyer will still be willing to pay $1m for house+building. I.e. any saving on the building cost will get capitalised to the land.

It the land cartel that needs to be broken first.

What about interest rates there kiwimm? Ever looked a charts of interest rates from the 1980's and overlaid them on average house prices for the same period? It's not perfect, but one could say they are inversely correlated.

All of these clever property investors have just benefited from dropping interest rates the last 35 years....lets see what happens as rates stay flat or rise.

Yes, the ability to pay that $1m is driven by the interest rate and the tidal wave of capital lending of the banks

I wish we had someone who's actually tried to develop some houses or apartments write an article on this topic.

Then we might hear about council involvement which isn't even mentioned here.

COMPLETELY agreed Davo, someone with actual in-depth experience. Major costs from council which never were, and let's not forget the impact of 15 percent gst. In my calculation the govt makes two billion a year gst from new housing

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15

Stupidity, greed and mass immigration mostly.

Well stated!

Stupidity and greed are close friends – mass immigration simply poor policy.

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Mass immigration is stupidity.

How about this example of stupid immigration decisions being made by the minister

Wealthy NZ migrant had three pregnant partners: why is he allowed to stay?
http://nzh.tw/12037904

Why does this article , full of blabla, sounds like someone is trying to drum his new venture in pushing pre-fab and Fletcher out of the way by buttering PT or others to do this and that ..etc ?

Negative gearing for home ownership ? that would be nice ...
build more shoe boxes at cheaper prices - that would work!

The author has a huge mountain to move out of the way first , the Local Councils and Big Private Land owners -

Seems like he is trying to get all sussed out in new tax and regulatory legislations to pave the way to build the future shacks

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Heaven forbid – perhaps he’s just endeavouring to be constructive.

Constructive - "having or intended to have a useful or beneficial purpose".

Maybe try it some time.

Then what, communism?

We're not in 1964 anymore Ian. Social democracy is not the same as Communism.

Don't worry, 'communism' is the simple man's rhetoric / buzzword when he can't understand an issue or is threatened by it.

Sorry, forgot to put the /sarc ON

Its a failure of intervention - not a market failure. Intervention by councils to contain urban development and intervention by Govt to create special NZ rules and standards for materials and consents.

Auckland Council is the elephant in the room , NOT offshore buyers , speculators , landlords , cheap money, immigrants , property developers, Bank lending policies, the excessive costs of Worksafe rules, convenient scapegoats , or anyone else .

The costs levied by the City are horrific , and add at least $100k to the price of a section in fees and levies that are wholly out of kiltter with the actual value add

How can a water connection to a new section cost NZ$20,000 with a meter costing just US$300 ?

DC levies are no such thing , seldom is any development done for this misnamed levy which is simply a TAX used to pay excessive salaries to council employees

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I don't think you really understand what the term "elephant in the room" means.

In your hypothetical scenario, take $100k off the cost of an Auckland house. Affordable now? Nope.

Central govt is raking in 2 billion a year in gst on new housing paid mostly by fhb buying new houses so they can satisfy the rb lvr lending criteria. 100k to central and another to local. That's 200k and you're wondering whether its an elephant

All Auckland regulatory costs (primarily land use regulation) add about $450,000 to the price of Auckland property over and above the NZ norm.

https://www.interest.co.nz/property/88883/government-says-land-use-regul...

It'd be a start though.

As a FHB who purchased a near million dollar home in Auckland middle of last year, that extra 100k would have been immensley helpful. Now, not so much, but at least my property value (for the time being) isn't decreasing.

Why does a 100k reduction upset you just because it's not 200k? It's a start, and it's this sort of attitude that stops us making bite sized progress to the real issue.

The native forests of yesteryear were sacrificed to build state houses. They are by and large gone as a free material source. Council tax aside, how can a prefab house built overseas, preconsented design and imported bypassing the fletcher tax (which is considerable) be a bad thing?

Well yes if you are a shareholder.

Affordable housing as in everyone can afford one is a pipe dream. What are the pricing numbers you are talking about with your foreign imported homes, then add another 200k as described for local and central govts. Bingo, there's goes the affordable Auckland housing dream

https://i.stuff.co.nz/entertainment/celebrities/103328543/shane-warne-sp...
Interesting read, they have foreign buyer ban, plus high holding land taxes on foreigners yet the prices continued to go up.

Property/land is a scarce resource. If not foreigners, we will have local players increasing prices. Any drop will be temporary especially in good suburbs. Regardless of all the gloom and doom messages, I can see Auckland prices hitting new highs in 5 years. Doesn't need to be investors, just people needing homes for their families and will have to compete with each other as supply is very limited.

Housing is not a market failure at all. When you totally constrain the supply side through restriction of land, the RMA and a totally inept council then you are doomed for failure.

You can't tinker with the market, cause a problem, and then claim it's a market failure!

Also immigration is not the issue. With the RMA and town planning systems we have there was always going to be a problem. In the scenario that's played out it's taken 25 years for the issues to manifest. In a higher immigration scenario it might have taken 20 years, or lower immigration it might have taken 30, but there was always going to be a problem. Immigration is just a matter of when.

Put it this way, if you could build or add to any type of house to any standard on any piece of land at any time without needing any approvals or permits (ie actually a free market) then we would have cheap housing prices. Every layer of approvals you add (land zoning, building code, earthquake proofing, RMA, you need carparks for a garage conversion etc etc) is another restriction of supply. Some of them are good initiatives, even with the restriction they add.

But don't sit here and tell me that it's a market failure or it's caused by immigration. Total nonsense.

If half a million people left NZ tomorrow would we have a housing problem? would housing be cheaper? Its immigration pure and simple, that and NZ property is a good place to launder and park your cash...

House prices probably would drop in absolute terms, but it's quite possible that the ability of the remaining population to afford them would drop even further, given the overnight loss of half a million customers, tax payers, employers etc

About 10% of Venezuelans have left and their house prices are rising faster than ever before.

I think the RMA and town systems planning we have in NZ are pretty good. Bulk land supply is more than sufficient to provide for our housing needs. We have moderate regulatory constraints for sure, but they are not massively onerous. The cities of Hamilton, Tauranga and even the Wellington cities get on with building sufficient housing within the framework. Christchurch managed to sustain a major earthquake and mostly cope with building housing.

NZ's only real problem is the complete incompetence of Auckland Council.

Auckland is currently adding more than twice the land supply it needs. But because this is Auckland Council, the idiots are opening up none of this land near Auckland.

Auckland has made Auckland City a fantastically costly place to build. But because this is Auckland Council, the idiots are building civic infrastructure (cycle-lanes, trams) designed for people building in Auckland City.

I'd love someone to breakup Fletcher's near monopoly on things. The cost of materials is out of this world compared with other developed countries. It's depressing watching foreign renovation programmes and seeing how far their money goes on materials compared to NZ. Why has no one had the guts to do this?

Also the 'rebate' is basically corruption. It locks buyers into a merchant (selling products from only one manufacturer) with inflated purchase prices that pass through to the client, and then the buyer get a backhander at the end of the year and a trip overseas. Dodgy as.

Great to see acknowledgement of the some of the broader institutional and systemic problems from an 'outsiders' perspective instead of the usual obfuscation and dissembling from the vested interests.

Very interesting to rank the component costs a FHB faces on an average new build home and section.

Largest is land by a mile
Followed by labour - on site and pre build eg Trusses Was etc
GST
Regulatory approvals - Services and utility connections etc etc

Way way down the list is Gib at about $ 4,500 material cost and where it wins today and will win tomorrow is the ability to deliver a cut to length sheet that fits exactly to the areas required.

Despite the constant moans re Gib Board costs in NZ - which is a very small market by world standards spread over two islands - even double digit % reductions in Gib costs will have no measurable impact on housing costs.

I think people are complaining about the cost of more materials than just Gib board alone.

The cost of building materials was also found to be far higher in New Zealand. A builder who operates in both markets supplied the commission with a set of costings for the same home in New Zealand and Australia: prices on the other side of the Tasman were three-quarters of New Zealand’s. Australian bricks, for instance, were 81% of the cost of New Zealand bricks; framing was just 14% of the New Zealand cost; and internal doors 74%. And no, the disparity in construction costs can’t be explained away by differences in the building codes between the two countries, say industry experts.

GIB is just one component. Timber, concrete, electrical hardware, septic systems, windows the list goes on. NZ is over regulated with protectionist standards backed up by the "NZ unique conditions" excuse.

You're forgetting just how crap NZ houses are. We have aluminium windows. Cold foundations. Thermal bridging all over the place.

One can't simply buy a bit of polystyrene to put in their foundation because the council want all the paperwork to go with it. Commodity products are required to be sold not as commodities but as certified systems $$$.

We have a perfect storm

- low interest rates driving up asset prices (the one thing we cant fix but a land tax would help - opps sorry the tax working groups terms of reference effectively make it a non starter - Government have the leadership to change the terms of reference)

- high immigration (can be fixed with a stroke of a pen)

- inelastic land use zoning rules (can be fixed with the stroke of a pen)

- monopoly building suppliers (Dear Comcom - where's focus on the HHI index?) - can be fixed with the stroke of a pen)

- Developer contributions pushing up the up-front capital cost of housing - the developers don't create the demand the users do. Better to fund from cashflow through targeted rates (can be fixed with the stroke of a pen)

Get on with it government - show some leadership