Rodney Dickens says higher construction demand will soon attract building capacity, so KiwiBuild's demands will be responded to by industry without starving other sectors for long

By Rodney Dickens*

A somewhat heated debate is unfolding regarding the government's plan to boost residential building via especially the KiwiBuild plan.

The conventional wisdom appears to be that capacity constraints will limit how much KiwiBuild and other government plans to boost residential building will translate into a higher level of building.

As is too often the case, the conventional view is based on lazy analysis or lack of analysis of how the industry responds to major upturns in activity.

Construction is a highly dynamic industry that has experienced major upturns and downturns in the past. Analysis of how construction employment responds to changes in activity suggests capacity constraints shouldn't be a major impediment to KiwiBuild etc. boosting total building activity.

The stalling of upside in total building and construction activity last year was the result of factors other than capacity constraint as discussed in our monthly building report that provides many other useful insights. However, there are other reasons to be somewhat sceptical of how much KiwiBuild will boost building.

If you say it enough times it must be right!? Yeah … Nah!!!

A somewhat heated debate is unfolding about how much the government's plan to boost building will translate into a higher level of building. See the link below for info on KiwiBuild that is Labour's major policy initiative but in addition the government plans for Housing NZ and others to increase the building of social housing.

There are a number of considerations:

• How many first home buyers will be able to afford the "affordable" KiwiBuild houses?

• How well will the plan for private builders to build the KiwiBuild properties work?

• How much will the affordability challenge be sidestepped by the government and/or banks introducing shared equity schemes?

• Will the government extend the scheme beyond first home buyers to help solve the affordability challenge?

• How much of a role can prefabrication of new housing play in KiwiBuild?

• How much will capacity constraints mean government-sponsored building largely just displaces other building?

Having just read an article on interest.co.nz presenting the Westpac economists' take on the issue - link below - I decided it was time to put in my tuppence. But only in the respect of the last consideration (i.e. how much the government's plans to boost building will be undermined by capacity constraints?). The other issues are discussed in our monthly building reports.

To make sure I didn't take any comments by the Westpac economists out of context I read the report that can be accessed here. The following are two quotes from that report relevant to the capacity constraint issue.

"… the Treasury has continued to stress that capacity constraints mean that KiwiBuild spending and private demand could crowd each other out."

"Capacity constraints are really what is at the heart of the outlook for construction. After large increases in recent years, the sector is encountering some strong headwinds, including rising costs and shortages of skilled labour. That means the KiwiBuild program will be one more buyer in an already constrained market. Even allowing for an increase in the size of the labour force over the coming years and a shift to smaller, higher density homes, the building sector is going to be wrestling with constrained capacity for some time yet. This means that, even if KiwiBuild related construction does pick up (and we have our doubts), this would likely result in private sector construction being crowded out."

Based on a range of media articles and reports I have read in the last couple of years it has become conventional wisdom that further upside in residential building activity is limited by capacity constraints particularly regarding workers.

It reminds me of an anecdote provided by a CEO in the building industry some years ago. He told me about an interview in which he had been asked to quantify a factor and he'd responded with a figure he had made up on the spot. He was amused to see this figure subsequently reported in articles and reports on the issue in question. It had become conventional wisdom without anyone checking to see if it was right. It was a classic case of "if you say it enough, it must be true".

Over the years I have found that a number of rules of thumb used in a range of industries are poorly founded. Rather than regurgitate the conventional wisdom I like checking how things work in the real world as I've done with the chart below.

One critical issue is how quickly employment in the construction industry responds to upturns in activity. The conventional view is it that will take quite some time for employment to catch up with the latest upturn. The chart makes a lie of this view.

Construction employment responds to changes in activity reasonably quickly. The best fit, with a very high correlation of 0.92 (like a 92% mark in an exam), is with employment lagging activity by only two quarters. The evidence is that employment in the construction industry responds quite quickly to changes in activity levels meaning that there is much more dynamic behaviour going on than suggested by conventional wisdom.

Interestingly, total construction activity, including residential building, non-residential building and other construction, didn't increase at all last year. Consistent with this and the traditional lagged response, construction employment is showing signs of topping out. The data suggest that the level of employment in the construction industry has already caught up with the level of activity. Evidence from the market place portrayed in the chart suggests that there is no or little basis for suggesting capacity constraints in terms of worker availability is a constraint on the level of building activity currently and by implication in the future.

This isn't to say that some building and construction firms aren't having problems attracting qualified workers. But several factors should help largely fix this problem in the context of the several years it will take for KiwiBuild to be scaled up:

• The government promoting apprenticeships.

• Building-construction firms training people.

• Pay increases in building and construction helping attracting works including some with building experience currently working outside of the industry and Kiwi builders working in Australia.

• The government making it easier for building firms to attract skilled immigrant workers.

Lots can be done to address labour/skill shortages over the three years the government plans to scale up KiwiBuild; especially because building is likely to take more than three years to reach peak levels.

As covered in our pay-to-view reports, factors other than capacity constraints are behind the recent lack of upside in construction activity. It is only lazy analysis or lack of analysis that justifies the conclusion that capacity constraints have stalled the upturn in construction activity. Equally, it is lazy analysis or a lack thereof behind the view that the government-sponsored boost to residential building won't result in much upside in total activity because there will be major crowding out due to capacity constraints, particularly in the labour market.

It should be a similar story with other factors impacting on building/construction capacity (e.g. truss and frame factories, cement, etc.). Following the large increase in activity in recent years, firms have and are responding by increasing capacity. This reflects normal behaviour in a highly dynamic industry.

This doesn't mean I'm not somewhat sceptical about the ambitious KiwiBuild targets because there are larger challenges ahead than capacity constraints. But equally, there are also some ways of getting around the other challenges that may stand in the way of KiwiBuild and plans to boost building of social housing.

Postscript

If you read the interest.co.nz article or the report by the Westpac economists you will see why I included "Yeah … Nah" in the title of this Raving. The Westpac economists should be complimented for trying to add some insights into the debate about KiwiBuild; related to the different views of MBIE and the Treasury over residential building prospects.

However, they highlight one of my concerns with the economic forecasters. Too often their views aren't supported by even basic analysis of how things work in the real world, like the insights provided by the chart above.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

41 Comments

With aussie housing slowing down, there's going to be quite a few spare builders and tradesmen. Which will help

Auckland's housing boom is a PR myth -probably convenient for the industry and media and politicians to peddle. But it doesn't exist. Auckland per capita is only building about half the rate that Canterbury achieved after the earthquakes and also what New Zealand used to build in the peak baby boomer population growth years of the 50's to 70's. https://medium.com/land-buildings-identity-and-values/aucklands-housing-...

My above report is from last year and Auckland's build rate has ticked up a few percent since then, but there has not been a big step increase in Auckland's house building yet. I doubt the problem is labour supply -given how after a few years this was able to be ramped up in Canterbury. The problem is land-use regulations and the resulting lack of competition from either fringe growth or intensification.

Good discussion about land-use regulations wrt Wellington is made by Michael Reddell yesterday, in an article titled -'There is abundant land'.
https://croakingcassandra.com/2018/06/02/there-is-abundant-land/

Brendon
Auckland's Unitary Plan rules wrt intensification are very liberal. That doesn't mean they couldn't be more so. But fundamentally I disagree with the position that the rules are a big part of the problem, in terms of intensification.
The bigger problem is what can or can't happen on the fringes of Auckland. This affects the land prices on the edge, and ultimately flows through to the urban area.
It's a matter of zoning but also infrastructure funding and sequencing - for me the latter being more important.
I understand government officials are working hard on these matters.

Fritz I am not against fringe development. I think Michael Reddell and many others make a good case for it. I have heard Phil Twyford say he wants 10-15 Hobsonville's around Auckland, presumably all competing to lower costs and provide better housing. That would be great.

But why not encourage some of that competition into Auckland's private land housing intensification space too?

As I explain in my "Can Great Design Help Solve the housing Crisis", https://medium.com/land-buildings-identity-and-values/can-great-design-h...

Given the current Unitary Plan rules -especially the recession plane rules and given the cadastral layout of property titles (the size and shapes of property titles in residential blocks) and given the economics of intensification, then Hobsonville will not achieved in any existing Auckland suburb. Even though there would be a demand for it.

The Unitary Plan will allow;
1. The building of sausage flats and
2. The slow provision of apartments

As an intensification supply response both options are flawed. The first provides less density than it could and the product has low amenity values. The second is slow because it requires site assembly by a single developer and has high construction costs.

My proposed solution might help. I don't claim it is a silver bullet. It can work alongside liberalising density rules like the Unitary Plan did and it can work alongside other housing options like fringe development.

Surely the housing crisis is so serious that all options should be tried?

Sausage flats are the BEST way to get affordable density, as they provide good yield and are an efficient, low rise form of building.
The Unitary does NOT readily enable them, due to its outlook space rules.

Fritz -interesting that your professional opinion is the Unitary Plan outlook rules prevent sausage flats being built. But all that means is that less intensification will occur than what is estimated.

I disagree that sausage flats are the best way to get affordable density. There would be other better ways if Auckland could build 'missing middle' housing types.

Sausage flats waste huge amounts of space to driveways and do nothing for a suburbs walkability. See the aerial picture in the following article showing in red how much land gets used for driveways and parking https://medium.com/land-buildings-identity-and-values/would-streetscaped...

If Auckand's new rapid transit suburbs intensify via the sausage flat and occasional apartment route then those suburbs will not be a success and Auckland will not achieve as much housing affordability and congestion busting transport/living as they want and need.

Interesting link.

4-5 storey apartments cost upwards of $4k - $5k per square metre to build. Sausage flat style housing $2.5k per square metre.
And I am talking of a '21st century variant' on the sausage flat that has a cooler design. And less land dedicated to driveway and parking (eg. Through more use of undercroft parking).
But you know what, this talk is idle really. The private sector can't build affordable housing in Auckland. The land and build costs are exorbitant. We need Kiwibuild to succeed, and it needs to be more sophisticated, including shared equity options.

Any subsidy by way of shared equity schemes, or LVR exemptions as Orr is suggesting, only feeds into the demand side, does nothing to get more housing built let alone more affordable housing.

There are two ways to make housing more affordable,

1) lower the input costs which really is about lower land pricing as a start, and then building so supply equals demand or
2) build excess supply with our present cost status quo, and then have the developers go bust.

Fritz I agree we need to see more action from KiwiBuild and I believe it needs to promote a multitude of different housing models, because the current housing model coming from the private sector is not working.

Ultimately though the point of KiwiBuild and other housing reforms is to fix the housing market, so the private sector can deliver affordable housing -this might take a decade or so. The government though will always have a role in providing social housing though.

Re my residential blocks being able to become their own master planners if the residents agree to it proposal, do you see that as helpful Fritz? I can't see how a Urban Development Authority partnering with KiwiBuild would be able to work in the private property space of existing suburbs unless you had something like that sort of voluntary scheme.

DP

If readers (or politicians) think that millenials have got over the housing crisis, then best watch the following comedy about rent from 'White Man Behind a Desk'.
https://www.youtube.com/watch?time_continue=1&v=ZH8ssoRdMV8

Its going to be impossible to determine whether the Kiwibuild houses are genuinely additional houses or slightly smaller versions of houses that would have been built anyway. And in some cases they will just represent the houses being brought forward which is half additional/ half would-have-been-built-anyway.
Nobody will know the truth on this issue. However spin doctors will of course claim they know the answer.

The facts that can be determined is the total amount of house building in Auckland (and NZ) and at what price level. If the build rate doesn't rise and if new build house prices do not fall, then I think the government will take a hit to its credibility.

Sad to say that the answer to your last sentence is already rather well defined. The build rate is decreasing and the house build price is increasing. Section price, well, that is situationally dependent, but in general it is not decreasing meaningfully. Interestingly, (and I am happy to see this) the sale price for an existing home on a section is flat at best. Fun times ahead. It would be best if build prices were to decrease but this requires some rather large structural changes to the market. One can hope though... the materials monopoly that exists here in NZ needs to be destroyed, and ideally the monopolists get the proverbial tar/feather treatment. Unfortunately this is not likely to happen...

KiwiBuild is going to be a flop.
Not one new Kiwibuild house been put up, and the so-called affordable 650k for a box will not be affordable for low income families plus no deposit!

The sooner everyone sees thru this BS from Twyford the better!

You hope!

TM2 thought the Coalition wouldn't last six months. I suggest his and C.O.W comments are an excellent guide to what won't flop!

I tend to agree with TM2 RP. Until we see tangible proof that KB is actually working, then the jury is out. So far Twyford has not sold the concept well, and we are on what is version 4, or is that 5?

To the layman it smacks of either an I’ll thought out plan, or desperation on the part of labour in respect of its flagship KB policy.

Whether you like the coalition, or despise it, this is what the voting public will judge labour, NZF, and the greens against.

Absolutely correct ... KB turned out to be a bad tasteless joke ... PT is struggling to find anything out there to label as KB, even 1/3 of the Northcote HNZ project started by National last year will now be build as boxes, labeled and sold as KB .. while these should be used to house the homeless or people on HNZ list (as initially designed) and save on their Motel Bills ....

This CoLs is now trying to save face and cover up their failure and incompetence - they have discovered how silly they were making promises they couldn't possibly keep !

The NZ public has already caught these losers with their pants down, any more spinning will make the hole bigger & deeper .... full of mud !

Everyone now can see how disconnected this Lot is from reality and what they have been preaching, it is clear where their priorities lie and surely crocodile tears will not save them in 2020!

After the shambles left by the National government, its going to be mammoth task to repair the damage. It's a shame you'll are losing sleep over National being in the dog house

Retired Poppy, where the hell did I say that the COL wouldn’t last 6 months???
You just make things up all the time RP!

This was what they went to voters with. “Labour’s KiwiBuild programme will build 100,000 high quality, affordable homes over 10 years, with 50% of them in Auckland. Standalone houses in Auckland will cost $500,000 to $600,000, with apartments and townhouses under $500,000. Outside Auckland, houses will range from $300,000 to $500,000”

Yeah good point, Rex. I'm actually pissed off that they have just accepted the new higher prices and will push ahead with the build (if they can). I really thought they will do something about build costs. Maybe part of govt owns Fletchers and won't break the monopoly. Taxinda and her mates are inside the tent now and they think it's ok for this rip offs material prices.

Ex/Rex Pat - whoop-Dee-Doo. Last September, the voters suspected nine years of inaction would become 12 ;https://www.national.org.nz/building_and_construction and National lost voters trust. Now that we're seeing some action, together with up front and frank communication, it's unsettling you and your fellow C.O.W - isn't it? It's frustrating the C.O.W cause when Labour and its Leader are holding firm in the polls ;-)

PMSLAO at the reference to up front and frank communication. Now let’s talk about land tax so we can get types you you and me to pay our fair share. That’s a tax I’d vote for :)

I note that says 100,000 over ten years, not 10,000 a year as many commentators here like to claim. The two are quite different.

It also says standalone houses at $600,000

What a stupid thing to say then Jimbo when we know that the Govt. Is only in for three years so why didn’t they say a figure for the first 3years?
Out of their depth, and we all know it!
Twyford will not last as minister of housing although wouldn’t know who to replace him with!

up
10

What would you do Man?
Oh that's right nothing - the status quo suits you very well

......Italy's new Finance Minister likes the idea of helicopter money and Merkel has also brushed off any debt foregiviness; https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=120... its a crisis thats not going to go away.

[ Please keep the slagging off of others out of these threads. Debate the issues. Don't make it personal. Ed ]

So according to burnt Bridges, the failing National leader. The current coalition is wasting tens of millions of dollars on its fact finding. Well thanks to the enormous increase in Auckland house prices during the nine years of National's tenure. Such costs only equate to the price of ten or so such houses. Surely a miniscule investment to ensure better decisions are AT LAST being made.

Incorrect as usual. It’s a stalling tactic from a bunch of no hopers. One read of the post here from an actual developer (a doer) is enough to know that KB was stuffed from the start. It doesn’t take millions to work that out, but then you’d expect the COL to have to pay for advice because so few of their supporters are doers.

Gordon, you are wrong on all counts.
KiwiBuild is going to be a flop.
The rate this COL is going they won’t build one house in 3 years.
Christchurch is becoming more popular by the day.
You stay where you are and enjoy it.
Challenge still there for you Gordon, but the fact that you won’t take it up clearly shows you are full of wind.

The Boy if they don't build one house in the next five and a half years I will vote for National in 2023. I will stay where I am thanks as my daily temperatures are nearly twice yours. I can see why so many live in Auckland let alone the North Island. I can also see why you have those cheap holidays in the Gold Coast to escape the cold down south. I went there once in 1997 and never had the inclination to go back to that hole.

Gordon they will be gone in 3 years so you are pretty safe.
The holiday in Oz is not that cheap, we went to Melbourne and then Surfers and in nice accommodation.
Life is for living Gordon, you need to get around and experience it!
20 years ago Gordon?
Things change in 20 years !

Is it correct that NZ coped with the capacity demands of the Christchurch rebuild? And that that rebuild is coming to an end? So are there not a lot of builders and associated labour that will be available for Kiwibuild?

The cost of land alone in Auckland is between 500K to 600K. Then add the cost to build the house. Total cost to buy a Kiwibuild house in Auckland ... 800K to 1M. I think the government have there head in the sand where people walk on roses

As long as high immigration continues then Kiwibuild can't keep pace and housing, infratructure and services are doomed to be overrun.
NZ had its top standard of living when we had a population of 1.5 million people.