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John Bolton shows what a property developer is up against when constructing houses. The costs of system inefficiencies get priced into the properties

John Bolton shows what a property developer is up against when constructing houses. The costs of system inefficiencies get priced into the properties

By John Bolton*

Over the past two and half years I’ve dabbled in property development, and am in the process of building 35 houses in Avondale.

The end result will be 35 finished houses (of which 90% have been pre-sold) in April 2015.

The project will have taken three years and the only reason we’ll come out of it ok is that we purchased the land cheaply back in 2011, early in a rising market.

We spent $650,000 upfront on getting the resource consent which involved taking the council to the environment court twice.

It is hard to spend hundreds of thousands of dollars on planners and lawyers when you’re not overly confident you’ll get the result. We eventually got the consent and that is a story in itself.

Our original plan was to build 27 units on a slightly smaller site. Based on our actual costs, that would not have been feasible. The extra units are where we have made a profit.

Scarier still we worked out our original feasibility based on a sale price of $460,000.

The sale price ended up closer to $570,000 but our profit halved due to cost increases.

Some of that was simply under-estimating costs, especially the cost of getting the resource consent.  But I also think that with costs it’s all about the incremental costs (another report here, another report there.)

The consultants spend of close to $1m is a reflection of that constant paper shuffling.

The project budget looks like this:

Development contributions $1,000,000
Consent costs $650,000
Sales commission and marketing $750,000
Finance $1,000,000
Consultants/Contractor Margin $1,650,000
Sub Total (Consultants, Funding, Sales) $5,050,000
Build cost $6,800,000
Earthworks $2,600,000
Land $1,300,000
Sub Total (Land and Build Cost) $10,700,000
GST payable $2,500,000
Total $18,250,000

The project margin is only 8% and house prices went up 25% between buying the land and selling the units off plan.

In the absence of that significant lift in prices our project would have been underwater.

The thing I can’t figure out is that land is now selling for about 25% more than we paid for ours (after allowing for our higher earthworks costs.)  What does that say about the viability of land still being sold?

Most people I talk to agree that land is being significantly over valued.

I blame the hype that came along with the Unitary Plan combined with the media reporting around the housing shortage.

What should be obvious from our project is that with a margin of only 8% it wouldn’t take a big increase in costs to sink a project (and a developer).

At an 8% margin it is tough to get bank funding on a project.

The key for us was 90% pre-sales, along with other solid income earning businesses.  Now that we’re in construction the costs are fixed, so this was more of an issue before we started.

Incidentally, the project is going well, most of the earthworks is done and the houses are now in the process of being built.

Are we capitalising our poor productivity into the value of houses?

Our 35 houses will increase council rates by $60,000 per year that can be used for roads, parks, and infrastructure.

Yet, we have been charged $610,000 in development contributions and another $300,000 in Watercare contributions.  That’s close to $1m of development contributions.

Even the building consent cost of $35,000 includes about $12,000 of levies.

The frustration with these costs is that they simply increase house prices, which increases debt levels for the end buyers.

I realise that infrastructure needs to be paid for, but would argue that it can be paid for through the higher rates collected.

I don’t get how capitalising these costs into house prices (and debt levels) is good for the country.

Like the council, banks have their own way of increasing development costs. This is more invisible but I’d imagine every developer will grumble under their breath.

My experience of banks too date has been that they insist on head contractors to de-risk a project, but head contractors are in high demand and they will typically take a 10% margin.  That’s a hefty tax right there.

It also feels like banks add a whole lot more paperwork and process than is necessary.

Our finance approval had 3 pages of conditions and added at least $200,000 of extra costs.

It’s the same for any developer that relies on funding.

Even with our total lending being less than 75% of the pre-sales figure, and with us having $5m of hurt money ahead of the bank, they have still been overly conservative. We end up in debates about project bills totaling $20,000!  That’s my point-of-view anyway.

On the other side, as new developers I also recognise that them keeping a closer eye on us has been good for everyone. But with $5m of our funds at risk within the project, you’d think we’d get a bit more rope.  All of this red tape adds up.

Of the value of each house only 55% relates to the cost of the land, building and earthworks.

Another 37% relates to GST, development contributions, sales commission, finance and consultants.

While build costs get covered in the media, the opportunity in my mind lies with the paper shuffling and everyone clipping the ticket.

Development is hard, hard work ... and risky.

I reckon that we have too many investors paying too much for land based on a poor understanding of development.

With all of this, including crazy land prices, we are capitalising our lack of productivity into house prices.

Worse still, we’re borrowing to fund this madness !


John Bolton is the principal at Squirrel Mortgages. This item first appeared here and is used above with permission.

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Thankyou John for bravely putting this out in the open. Well done!
Property development isn't the money spinner it used to be.
One would hope that a number of people in the Council would read this, assimilate it and change their ways. Alas, they are probably more interested in pet projects such as this mock (mockery) of a state house, the ridiculously expensive rail tunnel which will suck in the wealth of Aucklanders like the black hole it is.

thank you for providing this website with a well written article where the numbers supplied mean something, other than the usual economist mumbo jumbo, or real estate/banking marketing waffle that is all too often served up as factual.
You have provided the benefit of your experience in a simple and useful way - one of the best columns I have read for a long tme.
Good on you. 

John, I see a 'Finance' line on the costs, yet on an $18m project, with a 3-year time span, and a WACC of say 10%, I would have expected interest and opportunity costs to be double or triple that.
I suspect you've counted only some direct costs.
Could you expand on opportunity cost (what you could have done with the sunk $ even if not borrowed, at WACC, for the time span involved)?
Because, in terms of building in productivity inefficiencies, it's the whole, imputed cost of capital that needs to be taken into account, for a truly 'economic' view.

Opportunity cost - most obvious lost opportunity would be to own 18m of existing Auckland houses over the last three years going up at over 10% per year.  With the rent covering the bulk of the expenses he could have cleared 2m per year, each year, tax free. 

Terrible return over 3 years.  I have a number of other businesses that would have been much better receipients of these funds.  
It's an 8% return on total funds deployed and about a 25% return on equity over 3 years.  My equity component on another property I own went up by 300% over the same period and that was just for holding!
No regrets.  It's been an eye-opener and the best way to learn.

With all of this, including crazy land prices, we are capitalising our lack of productivity into house prices.
Worse still, we’re borrowing to fund this madness !
A trend encouraged by the actions of the US Federal Reserve and about to be repeated by the ECB - if Draghi's threats are to be believed.
If the Fed’s MBS holdings are of any direct consequence, they favor home-mortgage borrowers by putting downward pressure on mortgage rates. This increases the interest rates faced by other borrowers, compared with holding an equivalent amount of Treasurys. It is as if the Fed has provided off-budget funding for home-mortgage borrowers, financed by selling U.S. Treasury debt to the public.
Such interference in the allocation of credit is an inappropriate use of the central bank’s asset portfolio. It is not necessary for conducting monetary policy, and it involves distributional choices that should be made through the democratic process and carried out by fiscal authorities, not at the discretion of an independent central bank.   Read more
New Zealand created it's own central bank mortgage interest rate backstop/put when the RBNZ authorised the issuance of covered bonds which are eligible securities for domestic monetising purposes View RBNZ list of eligible securities.  
There is no legal impediment denying RBNZ the right to up the level of securitisation of outstanding mortgages beyond the current 10% limit, and the banks know it.

And yet: the USA has this secret advantage called "elastic housing supply cities". Around 120 of them.
Low interest rates and easy credit have no effect on house prices. What they do, is get more houses built at the same price; existing mortgages refinanced cheaper; more discretionary spending in the local economy; faster pay-down of debt; more investment in productive capital; and more productive businesses started and expanded. 
Oh, and sustained population growth and employment growth from people and businesses who get the start there that they know they won't ever get in the unaffordable cities. 
It is a mystery to me why so many people in the mainstream of economics cannot see right under their noses, Southern and heartland USA owning the future of western civilisation. Joel Kotkin is the single best "must follow" author on this phenomenon. 
Elastic housing supply actually means that a lot of demand side boosts that are now regarded as toxic, are beneficial instead, and many policies were designed decades ago under those very conditions of elastic housing supply that made them beneficial. Remember: first home buyer subsidies and mortgage interest write-offs and negative gearing and absence of CGT's and artificial super low interest rates used to NOT translate into house price inflation. If you were a first home buyer in those golden times, you were place on the pig's back. Cheap house, low interest rate, tax deductibility, etc etc. Becoming mortgage free in 7 years was not unusual.
But many people spun the mortgage out as long as possible because its terms were so kind that you might as well spend your income on things other than paying the mortgage off. I knew a few folk who still had a few thousand dollars on a fixed 3 percent interest rate in 1990, at the same time as being worth well into 6 figures. 

Even the Poms had an accidental beneficial lesson of history on this in the 1930's.
Escaping liquidity traps: Lessons from the UK’s 1930s escape
Nicholas Crafts, 12 May 2013
“…….Initially, short-term interest rates were cut to around 0.6% – and stayed there throughout the rest of the decade (see Table 1).
·         Second, a price-level target was announced by Chamberlain in July 1932 which aimed to end price deflation and return prices to the 1929 level.
·         Third, the Treasury adopted a policy of exchange-rate targets that entailed a large devaluation first pegging the pound against the dollar at 3.40 and then against the French franc at 77 (Howson 1980), intervening in the market through the Exchange Equalisation Account set up in the summer of 1932 (see Table 2).
Real interest rates fell quite dramatically and very quickly and gold reserves almost doubled within a year. By the end of 1936, the money supply had grown by 34% compared with early 1932 (Howson 1975).
The cheap-money policy followed the textbook approach for operating at the zero lower bound of seeking to reduce the real interest rate by raising inflationary expectations. A key aspect was that the Treasury under Chamberlain, rather than the Bank of England under Montagu Norman, ran monetary policy after the exit from the gold standard. The classic problem with the ‘foolproof way’, especially for central banks, is whether they can credibly commit to maintaining inflation once recovery appears to be under way. Because of its problems with fiscal sustainability, the Treasury was in a good position to persuade markets that it wanted sustained moderate inflation as part of a strategy to reduce the real interest rate below the growth rate of real GDP and to benefit from this differential in reducing the public-debt-to-GDP ratio. This reliance, based on ‘financial repression’, allowed more tolerance for lower primary budget surpluses and eased worries about ‘self-defeating austerity’ without a Keynesian approach to the public finances…….
“…….Obviously, for the cheap-money policy to work it needed to stimulate demand – a transmission mechanism into the real economy was needed. One specific aspect of this is worth exploring, namely, the impact that cheap money had on house-building. The number of houses built by the private sector rose from 133,000 in 1931/2 to 293,000 in 1934/5 and 279,000 in 1935/6 – many of these dwellings being the famous 1930s semi-detached houses which proliferated around London and more generally across southern England. The construction of these houses directly contributed an additional £55 million to economic activity by 1934 and multiplier effects from increased employment probably raised the total impact to £80 million or about a third of the increase in GDP between 1932 and 1934. House building reacted to the reduction in interest rates and also to the recognition by developers that construction costs had bottomed out; both of these stimuli resulted from the cheap-money policy (Howson 1975).
Why was house-building so responsive in the 1930s? Two factors stand out.
·         First, the supply of mortgage finance grew rapidly and became more affordable in an economy in which there had been no financial crisis that curtailed lending.
Building society mortgage debt rose from £316 million with 720,000 borrowers in 1930 to £636 million with 1,392,000 borrowers in 1937 when about 18% of non-agricultural working-class households were buying or owned their own homes. In these years, deposits fell in some cases to 5% and repayment terms were extended from around 20 to 25 or even 30 years reducing weekly outgoings by 15% (Scott 2008).
·         Second, houses were affordable to an increasing number of potential buyers.
85% of new houses sold for less than £750 (£45,000 in today’s money). Terraced houses in the London area could be bought for £395 in the mid-1930s when average earnings were about £165 per year. Houses were cheap because the supply of land for housing was very elastic which in turn meant that there was no incentive for developers to sit on large land banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932 – the draconian provisions of the 1947 Town and Country Planning Act were still to come……”

"Sustained population growth" to what number Phil, we now know that the human race needs to stop increasing its population, so how is sustained population growth a good idea any more. We need new ideas not bashed up, worn out old ones

I considered buying a unit here, it was great to see a developer aiming a development at an affordable price range (albeit out of my price range - hence I didn't buy).
If development costs were charged to relevent rate payers, would that lower the cost of development? Or would it simply allow developers to increase their margins.

A fair question. 
Not being unfair to the writer of the initeresting article, but I would expect the answer to be any developer would charge the highest price than can when selling so it would increase their margins rather as well as reduce the cost of developent.

Correct, the developer is going to sell the properties at market value. One presumes the price would decrease take into account the higher rates bill resulting from development costs.
But the downside is that the council would bear the debt of development costs - and Auckland Council's total debt is already out of control.

In the long run and in the main, the beneficiaries are the original vendors of land. In the above example, the gain since 2011 to the developer, is nothing on the gain that has already fallen to the land vendor.
Developers in the UK where all this nonsense has had decades to become normalised, actually form complex agreements with the land vendor so that the land vendor gets less in the event that local government and hangers-on gouge unexpectedly higher amounts out of the project. They start with "what the market can stand" in terms of the finished housing, and work backwards from there. 
The only way to change this zero-sum racket where the money either goes to the land vendor or to the Council and consultants and hangers-on, is to abolish the oligopoly in developable land - i.e. the growth boundary.

Good article John.
The costs are scary and most people are unaware of the risks involved.
Too many people clipping the ticket, equals higher costs and lending requirements for the developer and the end purchaser. 
Who benefits?  The banks of course.  Their business is debt.

The banks, and the original land vendors.
And I understand there is BIG shit about to hit the fan about a land vendor with a similar killing who just happens to be a Councillor as well. Conflict of interest mucho?

Bolton: reckons there are too many investors paying too much for land

Your land cost of $1,300,000 was only 7.1% of your total costs

How does that work?
Or are you not complaining about your particular project but referring to others?
Otherwise top marks for the presentation. It is rare to see an operator putting it out there for all to see. Again - Top marks

I like the way you characterize a trapped locked-in developer as a land-banker. That is refreshing. There must be a good number of developers who buy land, then when they are presented with the costs, discover the project doesn't stack up, and falls into a "hold", and the land is locked up until future inflation takes care of it

Yes, they are not land bankers, they are hostages to a racket. They gotta have sites to stay in business at all. They gotta engage in bidding wars against each other for a share of the land that is held by the de facto oligopoly of landowners inside the growth boundary.
Very few developers have been sensible enough to quit the industry and go lobbying for reform.

Great article but it would have been helpful to know what sort of housing and land you had. It seems you paid a small amount for the land and a large amount for earthworks. Can we assume you were building high density housing on a difficult site?

I noticed that too - I think you have it right. Difficult sites that might get passed over altogether when there is no growth boundary and land remains cheap, end up having to be developed, but the price the site fetches is lowered by its difficulty of development.
Even so it is more expensive than easy sites in the absence of a growth boundary.

Growth to what, Phil it cannot be an in perpetuity thing, even you must know that

Raegun urban growth can be for many reasons not related to economic growth. You must know that mandating existing towns/cities cannot change for any reason is just stupid.

Now lets see Sue Houston of the Planners Guild offer a comment
55% of costs incurred before you even turn the first sod

Sue will say as it's not part of an Offical Goverment Report it clearly is all wrong and John doesn't know anything at all about the planning system.  As an expert planner Sue has stated repeatedly that planning costs are negligible, who are we to question her?  I mean, what would a property developer know about this issue?

I want legal action taken against people like her, in a "class action" on behalf of all young people priced out of the market. I would love to have a chance to make an evidence-based case against her. 
At best, people who talk like her are incompetent. The alternative is that they are dishonest.

You dont half talk rubbish. The elected officials set the policy not such as her, she works within that framework.  Hence chnage it is simply a matter of voting.
If you think its such a great idea, sue yourself on their behalf Im sure you's win lods of friends.

Whatever. The voters believe what "experts" who are incompetent or dishonest, are reported as saying for their benefit.

and you can prove your competance?  tell you what sue, that will prove it so in a court of law.

Your Magic Vote again.
Haven't you learnt from the last elections?

If you accept that your vote is worthless, OK, I dont.
I meam what are the alternatives? the likes of phil best or whaleoil in charge?
Personally I would suggest the NZ voter showed very clearly the left and hard left (ditto right and hard right ) are not wanted in Govn, as 0.7% should shows us that I believe.


I did not say my vote is worthless.
You were saying you wanted change and the way to accomplish that is to vote. I am saying that the last elections should have shown you that that doesn't always work.
I think PhilBest's idea of a class action might just achieve something.


The problem with this stuff is
(a) The bureaucrats religiously follow what is published, whether it be in main-stream-media or digital media and/or social media. They know what is being said
(b) The spinmeisters and lobbyists are watching also - they have to
(c) The speed with which lobbyist Sue Houston came out of the darkness and did her worst at rebutting with blatant spin
(d) That Sue Houston even believed her utterances were credible
(e) Did one of her Planning-Guild members poke a burnt stick up her skirt and tell her to earn her keep
(f) Otherwise you never hear from them explaining why things are done
(g) Philbest just might be right - how would you muster that?

The last election wasnt too bad an outcome overall IMHO.  NZers showed they didnt want extremes from either side of the political spectrum.
Not being a lawyer but, to me a class action would need to prove a serious wrong doing in a court of law.  Now if the people PB wishes to target are acting within the bylaws handed down to them by the elected offcials then in effect I cant see there is a case. On top of that unlike in here which is a court of public opinion and nothing more PB would have to show gross incompetance on the part of these ppl and prove it with his own facts and data, in a court, I think he'd fail franky.

To split hairs if she means the cost to plan then yes I'd say the cost is small.  The impact of that planning on the other hand.

You actually sound like you understand something about the cost impacts of planning, and what is more, the comment is quite clever. Well done! Has some sense seeped in since we last met?

You really dont get it do you.

Iconoclast....I think you meant 55% costs and not a sod turned.

And yesterday someone paid $1,075,000 for 381 sq/m of land in Grey Lynn
What?, about 10 km (?) from Avondale
Try and get 20 finished houses on that

The point John makes needs to be emphasized time and time again.
Every single cost involved in development, winds up as Debt to the end consumer/purchaser.
John's example of $1m for consultants is not unusual.
District plans are so arcane, so full of dicsretionary powers, yet so powerful, that hiring experienced folk as Plan Navigators is needed:  just as the early explorers like Buller used Maori guides.
One local developer of my acquaintance bought a property spanning two TLA's.  Result was a similar planning consultant expense line, because (quelle surprise) the two District Plans involved did not, shall we say - Cohere, in respect of the particular property.
This is a classic example of economic deadweight.  In a more sensible world, it would not exist.
Yet it is Par for the Course, and Part of the Cost.....

The DC costs are a rort if ever there was one .
What exactly did council provide for the $1,000,000 ?
They will now be getting rates income for the rest of eternity .

They provided they peice of paper you need before your allowed to build.  $1m is quite a lot for a peice of paper.
More to the point, it's not just about the raw cost, it's also about the very real risks that you will be denied permission on very opaque grounds and end up in court with all the costs that entails.  The council is not shy about changing rules on a whim or even making up completty new rules at the end of a development and demanding you comply regardless of them already having approved your development without it.
A friend of mine had the lack of forsight to attempt a development opposite from the building the council planners sat in.  New demands came rolling in on a regular basis depending on said planners mood and personnal preference as they oberved his construction from across the road, often changing designs they had already approved months before hand.

In the UK where this sort of nonsense has been normalised over decades, developers usually sign up complex agreements with the vendors of land, that is kind of like "conditional purchase"; and even varies the price of sale according to the fees and other costs. 
The price is always so high anyway that it is worthwhile for the vendor to go through with it. In fact it is also quite common for the local government to be made party to the agreement and the costs they will gouge are thrashed out before anything happens. 
I am definitely not saying that this is the right course for NZ to follow. Somehow all this stuff was not necessary for decades, and I say it is obvious that it is all to do with whether the land supply is "competitive" or not. 

All a neccessary evil, over the 3 year period.
Hone would have taken 200k x 3=600k
(I hope the 35K for the recount, was the last of his waste of time, effort and money)
Every councillor would have needed their bread buttered.  1 Million plus.
Brown would have taken let me guess 300k x3 =900k...minimum....for laying down on the job.
Alice would have dug a bigger hole. Possibly interest alone... the balance.
The Bank would have wanted their cut, on top of the 1million eventually repaid.
The 35 people who bought, would all have been totally debt free...(Yeah right).
The hundreds of poor Savers would have got a measly return, no where near where you ended up.....nearly in doo doo....without the cheapest interest rates ....ever.
So nearly everyone  involved is happy...quit complaining.

The breakdown of costs is not dissimilar to Japan in the 80s & 90s when the property industry and frenzy fed so many mouths as part of a national self-perpetuating machine. When the unthinkable happened, the machine has slowly broken down, particularly on the ticket clipping mechanism. The biggest difference between Japan and NZ is that the Japanese have mastered the art of cost-effective construction at all levels. 

Japan is remarkable in that they had just one property boom and then a long slow melt back to quite competitive levels.
Anglo markets, on the other hand, seem destined for booms and busts on a cycle around 15 years long. Bubble price inflation is back in Los Angeles, San Francisco, Phoenix, Vegas, and Dublin. The UK has been having a 15 year cycle for decades, and California joined this phenomenon from the 1970's. It always dates from when a region goes "anti sprawl". 
The way Japan with 130 million people on similar space to NZ, has avoided this, is an essay subject in itself. It is really because the government operates directly in the RE market as a significant landlord, and operates on a "cost plus" basis rather than an extractor of rent. This anchors the entire market.

This is really interesting Phil and J.C as it indicates if NZ ever gets on top of this property inflation problem it will probably be by creating a body of institutions that is consistent with our culture and history. Probably with some similliarities to mid and southern USA, Germany and Japan.

Goes to show what a ponzi scheme the NZ property industry really is. Never ending capital appreciation is required to make anything viable. Cost plus a margin on land improvements doesn't work.
Something is seriously wrong. 

Correct.  Property development is dependant on a rising market to make a decent return.  Given the risks involved and the fat the land value rises anyway, is it any surpise land banking becomes the norm?  Just buy the land and sit back and wait until you sell it to someone else who can take the risks and you still profit nicely.

MikeM......cost plus margin doesn't work in the building industry'd soon go under!!   Small jobs around $6K and under you can use cost plus margin......but anything over that and you're losing.

I'm going to add to the chorus of appreciation for this article; great work John. In my opinion the Auckland Council is the start and end of property problems for Auckland and (via the OCR) a threat to the rest of the country. I don't develop anymore, why would you, I had to budget anywhere from 80 - 200k for a resource consent on a brown fields development. As you see from this article the only profit is capital gains in which case why not just buy existing houses.

Great Article John, and for having the courage to put it up.
Having worked for a number of developers over the years, you are what I call the equivalent of the ‘canary in the coal mine’ developer.
That is there are a type of developer/investor that can only survive in certain conditions (rising market), and act as a general warning to the greater/bigger developers and the population in general of trouble ahead when you cannot make a commercial return, break even, lose money, go out of business, and the trend is normally in that order.
And like the canary these type of developers have certain unique characteristics:
1.     They buy land close to time of development rather than as a land banker. This means that while you are entering the market because of perceived opportunity, the land you are purchasing is also being sold at that top opportunity value.
2.     Use a high ratio of borrowed funds at second tier rates.
3.     Need a high ratio of presales. (The price you sold for is locked in but not the cost).
4.     Entry/exit is normally 18 to 24 months which means a council hold up of 6 months or more will seriously compromise profitability.
5.     Are mid-size developments, not small enough to be in and out real quick and not big enough to absorb cost of delays and market cycle.
In this instance you have managed to exit OK so well done, but I think you did show a glimpse of the future for others  and the market in general when you mentioned that similar land has sold for more, costs are increasing, and prices flattening (?). 

Very good response Dale Smith....I do like the "canary in the gold mine" going to remember that one!! be sending both John's article and Dale Smith's comments to every Council and planning dept across NZ !! 
I hope more developers will come out and publish their stories/figures!!

Alan W. Evans is a significant author on the way the UK has gone with similar regulations, in force for much longer than us.
One of the things he points out, is that the development industry has become concentrated in the hands of fewer and fewer larger and larger players. The ability to exist through whole cycles requires seriously good capital backing and connections in the old boy network. 
And success is more about land capital gains and having good lawyers, than about being good at development and building.
The elasticity of housing supply in the UK has been measured by economists at "zero". That is, there is no measurable response from supply, to demand pressures that are expressed 9in rising prices.
An elasticity of "1" is the level above which supply response is just high enough to keep prices from rising. The USA's cities that the Demographia Report points out have stable house price median multiples of "3" also tend to score 2+ for elasticity of housing supply in authoritative academic analysis. The highest are over "4". This does not mean that 4 times too many houses get built, it means that houses get built 4 times faster than necessary to keep prices stable. 
And in contrast to the UK, this involves myriads of small players who enter and exit "housing supply" as necessary. There is no oligopoly on land supply, just endless leapfrog development disempowering any potential land banker. Infrastructure is funded by bonds issued under a legal structure that bypasses local Councils altogether. 

Spot on Phil.
I would further add that these type of USA systems that allow stable house prices also mean developers can mitigate any potential for loss. This is important as it equates to risk and thus it is more about reducing your susceptublity to loss rather than your ability to make a super profit that is needed to reduce any higher possibility to loss as in our system.
The abilty to mitigate the potential for loss is becuase there are no council barriers to slow the process so the developer is exposed to market forces that he has no control over for as little time as possible.
And any undeveloped land a developer is left with is easier to hold as the land was purchased at its present income value so is cash neutral.
There is no multi millionaire moments or bankruptcy busts, no up or down, no boom or bust, just stable inflation adjusted growth.  

Thanks John, your figures illustrate how ridiculous the beauracracy has become. 
One observation.  You are the principal of a mortgage broking company who by your own admission has never done this before.  In a truely efficient and compedative market you should not have been able make a profit.  You should have been competing with specialists who know exactly what they are doing who would have been able execute a lot of the tasks themselves, had all the resources and established subcontractors to execute the project far cheaper than you.  It would be interesting to see the figures for a similar project executed by a company that is set up to do this sort of work.  Their profits should be enormous based on your figures.
One question Have you accounted for your GST Credits

His figure is close to the gross figure for the whole project.  If his costs are listed as exclusive of GST then everything adds up.  If his costs include the GST component they do not and he is overstating the GST cost.  It is pretty unlikely that this is the case however.

Hi Chris,
It's our first project of this size but we've done plenty of build and small subdivision projects around Auckland and have a very good list of subbies.  Our build cost is very competitive.  We had 2 or 3 builders quote on it.  Ditto with Earthworks.
I see our problems as follows:-
High presales (partly due to the low margin) meaning that we couldn't get the last 12 months of capital growth.  Sad that property development relies on ongoing price increases.
Resource Consent costs and going to the environment court twice.
Consultants for Africa - admittedly I think we blew about $200,000 unnecessarily here by making some bad choices (ironically to save money upfront.)
Bank costs - the banks actually are a major contributor to consulting costs.  They're almost a double up on the council with everything needing to be signed off by multiple consultants.
Looking back on this project I think there is around $400,000 of savings we could have or should have extracted that would have got us to a 10% return.  That would have been nice and trapped learnings.
There would have be more margin for a developer that didn't require a Head Contractor.  It would be a fairly small number of developers that would get away without needing a Head Contractor on a project of this size.

This is a very interesting article by John Bolton. Well done.
I am not surprised at the difficulties being a developer. Reading it makes me even more pleased to be a long-term investor.

At least John will be adding value to the land. Some just buy it, sit on it for months or even years and flog it on to the next person at a huge profit.

Only the relative poor do that JT.
The rich don't sell.

"House prices" rising 100% over a number of years, like 2000 to 2007 (thanks, Clark and Cullen), is actually "land prices" rising 1000%.
"House prices" falling 15% (in real terms), like they did from 2007 to 2009, is actually "land prices" falling 25%. 
Guess why there was an epidemic of developers and their finance company backers falling over, even if NZ did not have a mortgage-related meltdown like in countries where house prices fell even further?
Property development becomes a HUGELY risky game under the new volatility created by obstructionist local government. 

When you make stupid statements like that you undermine your credibility completely
Which you do often
In that time period, 2000-2007, property prices increased globally by 100% or more
Clark and Cullen were not responsible for the global explosion

Iconoclast it is you who loses credibility because in hundreds of US cities mainly in mid and southern states property prices did not double in the time period you specified nor did they in Germany or Japan. So your statement "property prices increased globally by 100% or more" is just not correct.

Yet if you look at the capitals of the world, say London prices like some of NZ went up significantly probably 100% or more.
If there was such a real demand in housing why does it appear that the rises seem concentrated in the major cities? why is renting maxed out?
My concern is there seems to be a huge "lets do something as we have a problem" with little real data to prove what the action should be if any that seems risky.

Did property prices double in Berlin or Tokyo in the time frame we are discussing?

Declining former industrial cities like Liverpool in the UK are many times less affordable compared to their equivalent in USA, Japan and Germany.

If the driver for property is more people how does the fact that population growth is declining globally and in NZ case was lower than previous really high growth periods when property prices were stable.

Many cities in the USA grew by around 20% in the decade 2000 to 2010 without prices going much higher than a median multiple of 3.
Houston, Dallas, Austin, Atlanta, Charlotte, Indianapolis, Nashville, Raleigh off the top of my head.
The price of TV's does not go up because of increased population. Why should houses be any different? Just supply more. Not rocket science. 

Plenty of QE money printing in the USA has had no effect at all on house prices in 120 odd cities that don't have constraints on development beyond their fringes. This makes housing supply the same as TV supply and car supply - QE does not need to affect prices.

[ Personal slagging deleted. Please don't do it. Ed ]

[ ditto. Ed ]

Sigh. In ALL the markets around the world where prices exploded, the common factor was urban planners following a GLOBAL "save the planet" mania. In markets where housing supply remained as elastic as it usually was in former times, no price bubble occurred. 

oh and the USA didnt have a price bubble? at best you qualify with "usually" thats leaves the barn door open.

Nothing to do with Clark and Cullen, Brash would have caused the same effect possibly worse.
"epidemic of developers and their finance company backers falling over" because they operate in a ponzi scheme environment.  In fact historically I think such as these falling over is the first sign the ponzi scheme si going wrong.
"Property development becomes a HUGELY risky game under the new volatility created" indeed but we differ on why, welcome to peak oil.

[ Deleted. Ed ]

While the ecologically illiterate destroy the place, the world is not just one of economy

Here's your one shot then - tell us how to save the ecology WITHOUT economic means...

Reduce population to 2 billion or so and since we have not and will not contain our population growth and consumption rate pr capita the 4 horsemen will.   I also think its going to start within our lifetime (inside 30 years) one way or other.

[ deleted. Ed ]

If Brash had won the 2005 election I think property prices would have stabilized. He would have got rid of UGB. There would have been many complaints about car centric sprawl. I doubt Brash would have supported public transport infrastructure or cycle ways. In Christchurch the residential rebuild would have occurred in a splatter near the outskirts of the city rather than 10 s of km away in satellite towns and llifestyle blocks.

Rubbish, he has been the clearest guy in NZ on housing "supply" all along. He even commissioned a Report from Owen McShane on the subject, which was published in 1996. 
He complained at the need to push interest rates up to stem rising house prices, for which Councils are responsible, strangling land supply. It has been even worse since his time.
Notice how much Alan Greenspan gets blamed for "low interest rates causing the US housing bubble"? Central bankers cannot win. But even Greenspan is too underinformed about housing markets to defend himself with the fact that 120+ cities in the USA did not price-bubble at all, and they were all the ones with freedom for leapfrog development, which disempowers land bankers.

To continue my rewriting history theme because it is fun. Brash would have got rid of developer contributions as well as the UGB. Not supported the Super city and made smaller LG live within their means 1970s style. Brash may not have increased GST from 12.5 to 15%. So the John Boltons would have lower fees, taxes and cheaper land to do developments with.  Brash understands the importance to the wider economy in have low and stable property prices.
On the negative side Brash would not have supported public transport, the great improvements in Auckland such as electricification of passenger rail, Britomart etc in Auckland may not have happened. Those hovering around the poverty line would have benefited from cheaper housing but Brash is no friend to that end of society so would likely have given any economic gains as tax cuts to the well off.
Whether these changes would have have been sustainable politically would have been interesting. The Crony capitalists faction in the National party would have undermined him. The Greenies would have hated him. It is unlikely if the medium to low paid workers would have recognised the benefits these changes would have bought them.
Brash with these burdens and limited political capital would have then have to negotiated events such as the GFC and the Christchurch earthquakes.

"Not supported the Super city" wasnt this an ACT thing?
"Brash understands the importance to the wider economy in have low and stable property prices."
not so sure unless you can quote him?

Steven i am no great fan of Brash. He was too divisive and had a naive message that the market knows best. He didn't look at the institutional supports for the marketplace and the way they benefited some groups over others. But even back when he was the Reserve Bank governor he talked about housing supply.

NZ coolie Brash did not have macro prudential tools. OCR was his only tool. Otherwise i agree there is many variables.

what is LAC?

I don't give people in Brash's old position the benefit of "OCR is my only tool".  In such positions of power and influence and connections, it is up to that person to FIND better tools if that doesn't work.   "It's not my job" doesn't work for bottom end labourers...let alone heads of banking institutions or State...

Brash said plenty about housing supply becoming inelastic which would ultimately make his job impossible.
It is taking a long time, but there are mainstream analysts coming around to this. The OECD economics department's reports, for example.
Furthermore the BIS recently concluded in a report “Can non-interest rate policies stabilise housing markets? Evidence from a panel of 57 economies"
From conclusion of the study:

“…..None of the policies designed to affect either the supply of or the demand for credit has a discernible impact on house prices. This has implications for the degree to which credit-constrained households are the marginal purchasers of housing or for THE IMPORTANCE OF HOUSING SUPPLY, which is not explicitly considered in this Study……"

point out the problems counts for nothing.   Saying plenty... well I know people who say plenty about winning the lotto.  what did he _do_?  what did he create/discover towards a solution?  what did he try?