KiwiBuild could provide a launch pad for some major new competitors in the building industry and that could force costs down

By Greg Ninness

The Government’s announcement that it's calling for expressions of interest from companies interested in setting up large scale prefabricated housing factories could herald the start of a major shake-up of New Zealand’s construction industry.

The key to the role prefabricated construction could play in the housing market lies in a figure Housing and Urban Development Minister Phil Twyford gave on Newshub Nation last weekend, when he said the international benchmark for prefabricated housing was a build cost of $1200 per square metre.

Based on Statistics NZ’s building consent figures, the average value of consents for new standalone houses issued throughout NZ in the first quarter of this year was $2088 per square metre. In Auckland it was $2128 per square metre.

For townhouses and home units it was $2194 per square metre nationally, and $2252 per square metre in Auckland.

If prefabricated homes could be produced for anywhere near the $1200 per square metre that Twyford mentioned, that could potentially bring construction costs down by around 40%.

So it’s no wonder the Government is keen to see some major investment in prefabricated construction happening here, when it is committed to providing 100,000 new affordable homes over the next 10 years.

The carrot the Government is dangling to attract the capital and expertise necessary to set up and run a major prefabrication operation is KiwiBuild.

“The Government will invite companies to express their interest in setting up or expanding off-site manufacturing factories to make KiwiBuild homes,” Twyford said in his statement announcing the call for expressions of interest.

That clearly ties prefabricated building plans to KiwiBuild and the likelihood is that anyone looking at establishing such a plant would have a substantial KiwiBuild contract signed and sealed before they went ahead and set it up.

Those contracts could potentially be huge.

If they were for 3000 KiwiBuild homes a year for five years, at a target price of $650,000 each, that would be $9.75 billion of building work in the prefabricated building company’s construction pipeline.

And KiwiBuild is aimed at being big enough for there to be more than one company getting its hands on a contract that size in return for setting up such a plant.

If such factories were producing 10,000 prefabricated homes a year between them, it would be equivalent to just under a third (31%) of all the new homes consented in this country in the 12 months to the end of April.

If 5000 of them were built in Auckland it would be equivalent to 43% of all the new homes consented in the region over the same period.

And the new plants would not be restricted to building homes for KiwiBuild.

If prefabricated manufacturers could supply KiwiBuild homes at more competitive prices than other building companies they would likely also be in a position to win supply contracts for Housing New Zealand and other social housing providers, and to bid for contracts with third party developers building homes for sale on the open market.

The scale of what could be involved is sufficiently large to cause a major shake-up of the construction industry that could affect both building companies and their suppliers.

Unless they were operating in a niche segment of the market, building companies would probably need to scale up to be able to achieve the sort of efficiencies that would enable them to compete with the prefabrication companies that launched off the KiwiBuild platform.

And building at scale requires access to capital, so it’s likely the big companies would get bigger and many of the smaller players could find themselves being priced out of the market and left to wither on the vine.

Timing-wise it's likely to be around the middle of next year before we see ribbons being cut for new prefabrication factories, which roughly coincides with the time that the Government's new Urban Development Authority, which will eventually oversee KiwiBuild, should be up an running.

That could mark a turning of the tide for the building industry, and as we know, when the tide goes out suddenly, it can be a sign that a tsunami's on the way.

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54 Comments

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This prefabrication stuff just looks like a great idea. It would surely be a really positive thing. The days of tradies trekking across Auckland every day building a house from scratch should be long gone. And prefab factories will allow greater automation, quality control and (probably) lower barriers to entry for the people staffing the factory, who may not need to be fully qualified builders but could be more like specialised factory staff or machine operators.

Agreed. There are significant upsides to this deal if executed well.
Prefab makes construction more capital-intensive by reducing reliance on labour inputs, improving turnaround time and cutting costs dramatically.
Plus a renewed pace of construction will improve the health of the overall economy by downsizing our infrastructure backlog, easing housing inflation and increasing demand for affiliated goods and services e.g. engineering consultation, financial services, logistics, automotive, building materials etc.

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Yes. When I want a car I don't hire an automotive architect and registered master car builder to build one. I have a look around, slam a few doors, and then buy the one I like most within my budget.

This demonstrates another issue however, along with development of kit sets houses and freeing up land for development they will also need to substantially reform the legal framework to facilitate new building processes.

Keith Hay Homes made homes in their depot & trucked them off to the site for decades
NZ does rely more on open air building depots for mass construction whereas here everything’s under cover and lights running up to 3 shifts a day or 24Hr construction factory. Of course there’s variations on that.
Thing is Lockwood made Homes that could take a force 9 earthquake & this is what NZ should be considering

N Lights,

My son had a home built by Keith Hay a couple of years ago and moved onto their land. What a shambles. I wouldn't trust them to build a hen house. Cowboys.

Perfect.

Now why don’t National and Labour both commit to doing this and get busy doing it.

National can make political points on Labour not doing it quickly or well enough but we need an agreed direction of travel.

Your points about market share probably understate the elasticity of demand, especially if we can open more greenfields and reduce land costs at the same time.

Hardly
Perhaps Nick Smith could provide his housing expertise to help out Labour with construction after having achieved so much in his National construction roll ?
Such talent

Yes, also the environment, he can help with swimmable rivers.

He did, didn’t he? By redefining “swimmable”!

There is way too much positivity and optimism in this article.

The usual doom and gloom merchants should be along shortly to shout it down, squawk it can't be done and parrot their special phrases.

Let's put aside the fact that the term 'gloom and doom merchants' is a Fox-News-style catch-all phrase to limit discussion.

The argument of those who aren't PIE's (Property: Irrational Exuberance) would be that prices will come down from their current artificial levels when the supply chain catches up with current price levels. Modular construction will result in this happening faster.

A more efficient construction industry may reduce the significant boom/bust pattern of property prices.

Optimism usually reflects the likelihood of something succeeding so this could be a first for this untidy coalition called a Government.

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12

This is the kind of tsunami we do need!

Agreed, I am somewhat relieved to see something that is actually addressing the root problem instead of the usual political spin.

Better late than never indeed! This looks to be a positive viable & commonsense approach. Wake up call to our building industry which from both a regulatory and commercial sense, looks quite timely & welcome. Let’s just hope the brown cardigan brigade embedded in the bowels of bureaucracy, can be circumvented and prevented from stuffing the concept up.

Another task for Hercules.

Forcing down the physical build part of the total build cost is just going to make the costs of consents and inspections look even more extortionate. Or maybe a portion of these costs can be removed with some form of pre-approval/certification out of prefab factories?

It's there already: MultiProof - multiple-use approval scheme. Which means the brown cardies in TLA's don't get any say except for foundations and other site-specifics like recession planes and the usual box-ticking for thousands of dollars in Modest Fees.

My equally Modest Suggestion for the cardies, the planners and the disestablished old-school builders is to join the hiring line at the local prefab factory. The cardies and planners would have to Upskill to be of any practical value, of course.....who says that the First Year Free of tertiary was a dud?

The factory our prefabricated panels came from has a Christchurch City Council approved quality control process in place so we did not need the first 3 council inspections.

So only 15 inspections required then?

If you believe these numbers you have to believe the existing factory pre-fab operators are making an absolute fortune.

A market failure that no one has worked this out ?

Reality is that virtually all new pre-fab operators have failed.

The old hands like Lockwood just keep on keeping on but I am sure they would smile if asked to match these costs which are more a figment or wishful thanking unrelated to reality.

I understand the word of caution here, but I think the benefit is that the government is trying new things to solve the underlying issue which is the cost of construction.

Your comment about prefab construction isn't really appropriate here as they work perfectly well overseas.

to be fair, I don't know why other prefab companies have failed in NZ before. However you would hope that large government backed contracts coupled with a new government motivated enough to actively remove unnecessary road blocks, would change the environment enough for them to be successful now.

Grendel, it probably has something to do with the way land is sold. Often with covenants and pre-paid infrastructure making large blocks of prefabs impossible as:

1) Kitsets etc are often rules out by covenants because the developer wants to use expensive construction to push up the values of nearby lots
2) No construction company wants to put all their eggs in one basket by buying 100s of un-titled lots in the hundreds in case it all goes tits up.

I would guess failure due to the Carters/Fletchers and by association Branz Cartel. These guys have a strangle hold on product supply into the building arena, if they cant make money out of it they will choke it.
The supply line issues need to be addressed to get that m2 cost to where it needs to be. Labour costs are exacerbated currently by overbearing compliance requirements, these wont be in attendance with pre fabs. My limited research would suggest 30% of labour cost in traditional builds is compliance driven.

Sluggy. You are wasting your breath. NZ has weak predatory pricing laws and, anyway, apathetic Kiwis generally don't much care about anti competitive cartel behaviour in the construction supply industry.

We recently had a new home built for us by one of our area's leading award winning builders. I was astonished at the extent of time wastage throughout the entire project as days went by while the project sat silent, sometimes a week or more, waiting for sub trades to show up. Variations were poorly managed and pretty straightforward defects took months of back and forth travel to resolve. I estimate abysmal time management meant the project cost around 10% more than it otherwise could have.

MM ditto. Our family is building too and the lack of application to basic simplicity and coordination of task is frankly unbelievable. As quoth Grouch Marx more or less “this doesn’t look too difficult, why a seven year old kid could do it. Send for a seven year old kid.” But seriously your point is worryingly correct. Anybody with any good sense of business management knows that wastage of time and material compounds costs, and compounds them again.

Cost will really come down to how repeatable and simple the buildings are and how many are ordered.

Spot On JB.

Yes there are savings to be made using Prefab housing, and also importing from overseas, which I have done myself, BUT to throw the $1,200m2 figure out there like Phil has done is such a generalization that it is unhelpful.

For starters, a mobile home is also a prefabbed house and would be the cheapest type to build but the most expensive type to import, then there is variants of full panel, frame only etc. all of which would not make up the full components to build a house, ie still need concrete foundations, drainage, driveways, labour for assembly etc, all done at this end.

So this $1,200m2 figure is misleading. But lets take Phil at his word on this and take it to its most logical conclusion:

1) That if he is going to do this importing, then the no one in NZ can complete, and that includes the NZ based Prefab people.

2) If he can truly get the housing for that price, then that he what he should be doing for all Kiwibuilds, remembering of course that the local building industry is at capacity, so by ring fencing the kiwibuilds to overseas contractors, then the local builders are not missing out, other than missing out having to gear up for something they would struggle to do anyway.

Then it raises the point that Squishy commented on, ie we don't make cars anymore in NZ because it is not economic to do so as we can get better value and cheaper cars from overseas. That is, maybe we should also be looking to make this the main option with housing for everyone, and any local building is just for custom (hotrod), bespoke work.

After all if this $1,200m2 is correct, why would Phil only allow the Kiwibuild houses to obtain this great price (if they exist).

But of course this does not mean houses will be cheaper even if this figure is correct, because as long as we restrict the availability of land and services, then any savings on the house side will just get capitalized into the price of land first, and then Govt/council second in the way of taxes, levies, fees etc to fund their dreams (your nightmares).

I bet if you ordered 100,000 similar basic prefab houses overseas you would get a much bigger saving... This is the advantage the government has over normal developers.

My surprise with this is that the Government hasn't just insisted that major Government projects aren't done with pre-fab construction. For instance, if all new school buildings were modular construction to a standardised design that would create a viable industry and at the same time free up a $ billion in construction worker to go into building houses. And before tomorrow's schools all schools were a standardised design - not necessarily a bad thing.

An excellent idea - could specify non leaking and save Billions !

Non leaking will be an optional extra

One would hope so - but can see the headline coming:

"Phil Twyford Confirms Partnership with Fletcher Living to Build Prefabricated Houses"

Followed by....

"Labour are giving birth to... affordable homes ..bla bla....$650k for 130sqm ... bla bla... FAST TRACK bla bla greenfield Huntley .... something ... underwrite something factory subsidy something billion dollars .... help families ... create jobs" says Twyford.

And the building methods are not the core problem. Land costs about about 50% of a house. Then there is plenty of box ticking costs... soil reports, consents, health and safety, inspections, valuations, BRANZ monopolising materials. All for single story low-spec residential housing.

Stick and fluff isn't cutting edge by any means but every other country seems to do it cheaper.

What's wrong with Huntly?

Pestilence

"What's wrong with Huntly?" An all time classic by Hugh Sundae. Can't find a link anywhere.

Bang on!

I don't know that many landlords live in Huntly

Very few things in NZ ever come down.
Years ago very few plumbers,dentists,electricians etc were around and prices were expensive.Now plenty of builders,plumbers ,dentisits and other trades and guess what....prices are up.

I'LL BELIEVE IT WHEN I SEE IT.

You're describing inflation which is a different topic.

They are trying to address affordability which is related to inflation this but takes into account income, which is also up just not at the same rate, which is the problem.

I did this years ago when I was running large industrial refrigeration systems companies and Mechanical Services business in NZ and over seas. Principal is simple fabricate and assemble in controlled environment -no weather issues,nor wrong parts/aterials on site, controlled work hours and quality systems ensure they are built to spec on time and to budget.We did it using 20ft and 40ft containers. Our next step in Singapore was then move onto homes as they did in Sydney in part when they built the 2000 Sydney Olympic village accommodation park that following the Olympics was then converted to high end apartments. Bring it on!

They also need to severely overhaul BRANZ as it is currently heavily influenced by the big names in the building and material supply industry and operated pretty much as a non tariff trade barrier.
I don't see why we cannot recognise that overseas products made to very reputable overseas standards are also perfectly acceptable. The BRANZ rules have allowed some absolute disasters, so really are we in any position to say that we know better than the codes form the Europeans , British, Americans and the international Building Code, the IBC.
I was reading somewhere a couple of days ago that the 2012 Productivity Commission report found the building products in NZ were 76% higher than overseas (Australia I think). This pretty much lines up with what I saw when I compared an Australian Bunnings sales brochure with their prices back in NZ. (Same company with the same bulk purchasing power selling largely the same products)

Further, when building our house I asked our window makers why no body mass produced windows to standard sizes. It would surely be far cheaper. Unbelievably his answer was that it would be far too competitive and they all would not make as much money!!!!!! They preferred it the way it was. One suspects that this is probably a telling indication of what is going on in the whole industry; so there is probably also scope for standardisation and mass production in these sorts of areas too.
I have no sympathy for the NZ incumbents. They have had it all their own way for years and have milked it for all their worth.

Yes when any entity such as Fletchers becomes dominant, money becomes too easy to make and then corners are cut to make even more. Cue the Doobie Bros, what were once vices have now become habits. Too much clout and cronyism between the like of Fletchers and governments going all the way back to Trotter & Muldoon. Lack of real market competitiveness just breeds arrogance, ignorance and inefficiency, which the current financial weakness of Fletchers bears due testament to.

@Foxglove .......... Fletchers are the elephant in the room . They dont want pre-fab unless they are the dominant player .

If that happens were stuffed

We should allow imported kit -form houses from Germany , Poland , the US and Canada to keep the local yokels honest in their pricing

Our family is building at the moment. Staggered to discover just how many suppliers down the line are part of the Old Hungry Lion which well and truly rules the roost. Builders & subbies alike work almost under bondage.
And we have witnessed some failings in supply and service from this outfit which, if they were not true, would be funny. Current mess constructing Novotel at CHCH Airport is par for the course. Well overdue for the shackles to broken.

Exactly. When we built our house 4 years ago the tradesmen were not making much and were well and truly screwed down by the building companies. They may have a bit more leverage now. Find it very hard to believe JB's assertion below that materials are only 24% the house cost and therefore labour costs are 76%. About 30 years ago I built our house as principal contractor and subbed out all the trades. The house cost something in the order of $120,000 with about $30,000-$35,000 in wages and salaries. It left me with the strong impression that the value of the materials that pass through a tradesman's hands was far greater than his wages, so it was not worth skimping on good tradesmen. (if you can find them)

When quoting with one building company I found Fletchers actually make windows and doors in standard sizes.

However no discount wasn't passed onto the customer as far as I could tell. Another building company used nulook windows (cut to size) and cost around the same.

The material content of your average house is about 24 % of final cost of house and land.

Fletcher's could supply about 8 %.

Reality is that even reducing costs dramatically will have no significant effect on housing costs. In addition locally produced wallboard can be cut to length here to suit various designs. Imported will be standard lengths and of from the US imperial not metric dimensions.

Why would a builder instal a non BRANZ approved product and then fail to get a compliance certificate.

The issue of housing costs is far more complex than initial examination would conclude.

GST at 15 % is next after land and resource consents a far bigger cost than material components of a house.

Excellent initiative.
But the key will be in the execution.

Lets not be too quick to say anything will ...................."force prices down "

If Fletcher Group has anything to do with pre-fabrication , you can be sure the price rigging status quo will be maintained .

It will start with a ban or tariff protection on prefabs from outside NZ .

I dont think this Government has the balls to stand up to powerful vested interests in the building supply chain

I do not understand why we have to bring in immigrants to build houses.
When I was living overseas, I noticed the building companies there employed many foreign tradespeople on strict contracts that they return home after completing their contract.
In NZ we bring in immigrants to build houses with the condition that they get permanent residence later.
We have crazy immigration policies in this country.

Big fish eat small fish.
True of fish stocks and capitalism.
In the end there will be a few players to provide housing and they will form a cartel to fix prices, somewhere around the current prices.
You know that.. Its capitalism.

Its not all beer and skittles for carpenters, I'm hearing plenty of examples of guys getting screwed by the house building companies and big construction firms which is just driving them over to Aussie again, so the industry is creating its own staff shortage. The prefab approach will need skilled staff to deliver top quality work, its not a job for monkeys thats for sure, hopefully the projects get off the ground!