Govt 'market level inquiry' on residential construction costs due mid-year as Motu prepares paper on impact of potential shocks to housing market

Govt 'market level inquiry' on residential construction costs due mid-year as Motu prepares paper on impact of potential shocks to housing market

By Gareth Vaughan

With housing affordability set to be one of, if not the, major political hot potato of the year, a Government paper on the impact of construction costs on housing affordability is due for release mid-year, and economic and public policy research institute Motu will shortly release a paper covering off the potential impact of assorted shocks to the housing market.

A spokesman for Finance Minister Bill English told interest.co.nz that, as signalled in the Government’s response to the Productivity Commission’s report on housing affordability last October, Cabinet has requested a "market level inquiry" into the construction sector. It's aimed at identifying "market level barriers" to improved housing affordability.

"An officials paper is expected to be delivered in mid-2013," English's spokesman said.

English told Radio NZ on Tuesday that 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.

The Productivity Commission's report included a table covering the cost of a series of building materials in New Zealand compared with Australia, suggesting the all up cost in Australia, as a percentage of the New Zealand price, was 76%. The report suggested New Zealand has 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.

Another reason cited for building materials costs being higher in New Zealand was that despite huge transport distances, Australian manufacturers can generate cost savings through volume transport using their country's rail network.

"In contrast, New Zealand’s transport costs are increased due to a lack of transport infrastructure, mountainous terrain and the need to ship materials between the two islands," the Productivity Commission's report said. "Transport costs assume particular significance given the heavy and bulky nature of many building materials."

Spotlight on Fletcher Building?

Its report 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. Last October English noted any investigation into the industry would have to look at the strong market positions held by Fletcher Building. The building materials manufacturer and distributor's businesses include Fletcher Construction, Formica and PlaceMakers, and its products include Pink Batts, Winstone Wallboards, Golden Bay Cement, and Gerard Roofs.

In his radio interview this week English also referred to a study showing that when a new family arrives in Auckland it takes eight years for an additional house to come on the market. This, it turns out, is sourced to a Motu paper. Motu senior fellow Arthur Grimes told interest.co.nz the paper was written for the Department of Building and Housing late last year. It includes predictions of what might happen if a range of shocks, both on the supply and demand side, hit the housing market.

The line English referred to was in regards to the impact of an immigration surge hitting Auckland, along the lines of the one in the early to mid-2000s.

"It takes about eight years for the housing market to fully catch up with that immigration surge," Grimes said. "it takes time to rebuild the stock from a big surge in population."

Immigration spiked from the third quarter of 2001. It peaked in the first quarter of 2003 when a total of 14,027 more people entered New Zealand than departed. Auckland is the biggest destination for immigrants.

Motu working paper near

Grimes said he was now rewriting the paper to incorporate some longer-term scenarios used in an Auckland Council seminar. It would then be released by Motu, as a working paper, hopefully within a month or so.

The increased focus on housing affordability comes after an annual international study comparing 337 urban markets, released this week 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.

 

Housing is considered "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.

The Labour Party has pledged to tackle housing affordability by building 100,000 houses at an average cost of about NZ$300,000 each over 10 years with leader David Shearer saying this price is plausible because building new homes on the scale of 10,000 a year would bring costs down by about 30% to 40%

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23 Comments

Another report, another set of consultants anything but actually building some Affordable Housing, Due Mid year ish.
 
Another 6 months of breathing space for the Nats, Keep on kicking that can down the road.
You know things are really bad when the Salvation Army say No More Room at the Inn.
What about the $104 million that the Social Housing were alocated, how come they want to spread that to market over 3 years? doesnt sound like they are taking the current housing crisis very seriously at all.
Affordable Housing projects that met the criteria are on the back burner as the SHU want to invest 33 million a year for 3 years. Why Wait? Why draw this out?
There is a massive amount of lag in the construction process, its not like running light bulbs, you dont run 20,000 over night.
if the Government want action, then take action and start spending on building homes and not consultants and more reports.

Hugh,
Can I ask...Do you have any faith in Nick Smith?

Thanks Hugh - look forward to checking out those links.
And I really hope you're right...that is, the political will being there.

anyone would be better than Heatley. the Nats "A team" is lookng increasingly tired and uncredible 
personally I have zero faith that anything menaingful will happen in the next 3-4 years
The only things that can meaningfully help the housing crisis are either a radical shift in planning policy or strong govt intervention with house building. The first option could be realised through a revolutionary unitary plan in Auckland, but even were that to happen, at best it will be 4 years from being operational. And the nats WILL NOT embark on meaningful state intervention
The building materials enquiry is a waste of time. NZ will always struggle with economies of scale, its an unavoidable consequence of being a very small island country remote from anywhere 
So in my view the crisis will explode in the next 3 years, potentially with catastrophic bubbletastic consequences
I for one have been harping on about this for at least 4-5 years, and am frankly getting sick of it. I occasionally will spring up on this website though because I still care enough (only just) 
I feel at some point in the next 3 years there is going to be a very ugly consequence out of all of this inaction
 

Thanks Matt,
Just to say, I think what might be the biggest problem in all this, is that the vast majority of young New Zealander's don't realise that their crazy property market an artificial and essentially deliberate creation. They think it's incedental or even natural. Alas - they should be protesing by the thousand in the streets!

Ok Hugh,
 
To say, I think you've got the right idea making reference to Houston property markets, for a slap-in-the-face reality comparison on how much we're being screwed.
 
As a tip for any future marketing of the issue, I think the first thing that should be presented to an audience, for an affordable housing movement, is a picture of an attractive house with a caption that says somthing like: "This house costs $200,000. But you have to pay $400,000 for it. What's going on?" I think this is the best first-angle of attack to get people interested who don't yet know that they should be interested. Just a suggestion!
 
Also I celebrate your efforts and your work with Cantabrians Unite. (I'm currently thinking about how I might help with this issue myself.)
 

I agree Hugh, the goverment is finally getting the heat from the population about excessive housing cost. but I don't think they are in much position to do anything about it at least before the next election.
 
This is political failure by John Key who refuses to acknowledge there is a housing cirsis even just a few months ago. (he said lowering housing value is a bad idea !! ).
 
We will now have a bidding process by all major political parties to show who is going to reduce housing cost by the most. But as usual this gets into political play acting. And either nothing happens after the next election or the housing industry gets into more trouble when excessive goverment action swings in.
 
You cannot never underestimate how much politicians can screw up things. 

A Government gets pressure only if it really cares..what makes you think they do..most of this Governments supporters are not effected....

Kin you can look at this point from another angle. If the National party actually did something about affordable housing they might get more voters from the poor, young and Christchurch residents who traditionally vote left while not losing many right wing voters.
 
I think the National party have the most to gain from solving the issue. The Left make all sorts of promises and might set up schemes. But I suspect they will preferentially help there supporters while transferring the cost to the rest of society.

Actually what apparantly decides elections is the swing vote which has grown to be substantial.   "Transferring costs" is something the right do as well if not better than the left, just they are more subtle at it.  eg in the last tax cut National handed out, where was that spent? very probably property....
regards
 

I am not defending or a National party supporter. I think there is a huge crony capitalism streak to the party.They have sat on their hands for 4 years doing b... all. I am just saying that they have an opportunity to act for the best interest of the country and it will pay off for them politically.

The swing votes is where you win elections.
 
If Labour (forget Greenies) can seduce enough of the "new" middle class (ie new families just starting into the property ladder) to give them the chance to prove they can do $300,000 houses, they will trash National in the next GE.
 
This is a BIG carrot for the voters, and a BIGGER prize for the politicians.

you got it kin. It will decide the next election. House ownership in Auckland will be under 60% by then. A lot of disappointed people, unable to afford a house, a basic necessity of life (somewhere to live). National would have to do soemthing big and quick to win back credibility, which they have lost on housing. Labour is currently in the box seat with the Greens on these issues.

KIn - depends on the proportion of voters in that category.
On the other side of the field are those with homes who could think the value of their property is being undermined in some way.  I have had a couple of conversations lately where people actually got upset that Labour should propose a cheap housing policy when they had had to pay what they saw as the fair market rate. 
 
 
 

A good example of transport costs and economies of scale.  If I want 1 sheet of 40mm bamboo ply ($400) the shipping cost from Auckland to Wellington is $120.  If as Im ordering 10 x 10mm sheets and 3 x 15mm sheets ($1800) the transport cost is $175, both delivered to my door. Rinse and repeat....
Interesting thing is 1 x 10mm CC grade plyboard in Placemakers/Bunnings is $90~110, yet Im only paying $130 for a high quality finished bamboo sheet. Or go through trademe on materials like flooring and look then in the DIY stores, I just have to wonder.
Another a set (5) of "cheap" irwin chisels is $120NZ, I can import (and Im going to) a set of 6 high quality Czech chisels from the UK for  $70 incl postage.
Also what would interest me is the levels of debt for building suppliers in OZ and in NZ, some suggestion is 35% of the cost of a good is debt servicing.
regards
 
 
 

I agree, the building cost in NZ is way too high and we need to stop Fletcher monopolising the market.  In our last major renovation; a sheet of bracing gib cost rough $45 - I know I can get another brand for about $25 but Fletcher loobied the govt to put a hefty import duty on that particular product in order to protect their patch!
My recent visit to the US - I bought a nail gun $329 from a local hardware store - same product at Placemakers $899.  Economy of scale????  Nope it doesn't stop Placemakers from buying the same product from the same store as I did and sell it for $599..
 

It's not just materials steven...you can buy a Belling gas top cooker in the UK for under 400 pounds with VAT...have a look at what Harvey Norman is asking....try and explain the difference....

The Supply side is being thrashed here.
The Demand side is ignored to the extent that while we send off our potential workforce to Australia we continue to open the door wide to all sorts of immigrants with a pre-loaded deficit in skills, language and ability to interact. Add also  (in Auckland anyway) the cash-loaded and often absentee investors with absolutely nil interest in the future of the country. 
It is interesting that while Auckland supposedly has a shortage of housing there are many signs appearing  'For Rent'. Is there really a shortage or just the imbalance between those who hold the rentable stock and those who would buy but cannot afford to start?

Comments about  the Motu report should include asking what the effect of immigration really is. In ignorance my suggestion would be that even if net migration is zero there would be an imbalance of most inward immigration is into Auckland while outward movements are from a much broader source.

However, chaps and chapesses - the Auckland situation re immigration is not quite paralleled here in Chch where the supply side is most definitely fingered as the main culprit....all politics is Local.

Mainzeal - NZ's third largest construction company goes into receivership! 
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1086...

Very serious news - an immediate explanation is needed - I believe they are owned by a chinese corp.
Bank Holiday announcement as well  - the shit must have hit the fan somewhere -I wonder who the local bankers are - never a dull moment in lazy old NZ..
 
According to Stuff:
 
PWC partners Colin McCloy and David Bridgman were appointed as receivers for Mainzeal and associated entitities, as a result of a request made by directors to Bank of New Zealand.
 

http://www.richina.com/
Interesting to see the Chinese factor and wonder how that fits into the picture with the Richina private equity company involvement.
 
In New Zealand, Richina Financial Holdings operates Richina Finance Limited, a finance company that has the objective of securing a full banking license that will attract depositors from China who wish to diversify their offshore financial holdings but will focus its lending activities onshore in New Zealand.
In the Real Estate sector, Richina has diversified development, infrastructure, construction, interiors, project management, property ownership and facilities management operations in both the commercial and residential sectors operating between China and New Zealand. Richina owns and operates 116 acres of land with 4.5 million square feet of improvements in Shanghai. Its New Zealand subsidiary Mainzeal Property and Construction Limited has been a leading real estate development, infrastructure and construction company in both the commercial and residential sectors throughout New Zealand since 1968.

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