ANZ economists expect building industry to 'muddle through' at still-high activity levels, but it's not an easy road ahead

ANZ economists believe it will be difficult to achieve further increases in construction activity despite the strong demand.

In their weekly Market Focus publication the economists say labour shortages are a much-cited problem in the construction industry, but problems run deeper; as well as issues with contracts and boom/bust dynamics, the productivity performance of the industry is poor and needs to be addressed. In light of these challenges their central expectation is that "the industry continues to muddle through at still-high activity levels, but recent events highlight that it is not an easy road ahead".

They say the challenges facing the construction industry are complicated and there are no easy fixes.

In their view, areas that need to be closely examined include:

 Competitiveness in building supplies;
 Risk sharing in contracts;
 Industry training – both its quality and relevance;
 The building code;
 Availability of land; and
 Legal frameworks around financial protections. 

The economists say although there is plenty of construction work out there, profitability is squeezed.

"In May a survey by BDO of more than 100 construction firms and sub-contractors revealed that many players in the industry are operating on unsustainable margins. This is consistent with broader business surveys; in the [ANZ Business Outlook survey] (ANZBO), perceptions of profitability have deteriorated precipitously over the past two years, with 17% of construction firms pessimistic about the outlook (figure 1). 

"As figure 1 shows, construction firms are also finding it difficult to get credit, with 27% of firms reporting that they expect it will be more difficult to get credit in the ANZBO.

"This perceived tightening has occurred at a time when firms appear to be increasing their reliance on credit lines. According to the RBNZ, credit to firms in the construction industry increased almost 8% over the year to June.

"While partly reflecting necessary investment to meet the uplift in construction activity that’s occurred over the year, we suspect this increase in credit to the industry also partly reflects increased reliance on credit lines on the back of financial constraints and cash flow issues. Indeed, the BDO survey found that many construction firms are operating with inadequate financial reserves, some are not complying with the law to hold retention money in trust, and 27% of respondents report difficulty juggling cash flow."

The economists say a concerning aspect is the rise in risk taking that appears to be occurring.

"There are reports that project tendering is often based on unsustainably thin margins in order to secure work, particularly in the commercial space. This means that there is little buffer should mistakes be made, prices increase or sub-contractors or materials be unavailable, causing delays." 

The economists say that the construction cycle has entered a new phase and firms will need to adjust to that.

"While previous decisions may have been made on the assumption that growth will increase strongly, as it certainly has in recent years, it will no longer be possible to rely on strong growth. MBIE are expecting building of new homes to increase more than 30% from 32,900 consents over the year to June to 43,000 per year in 2023; without changes in the industry, we think this will be difficult to achieve. 

"If anything, there is a risk that activity slows from its current high level; we are hearing reports from firms in the industry that the commercial pipeline is looking less assured, at a time when the general outlook for economic activity is looking a bit softer." 

It is possible that recent woes in the construction industry will prove to have isolated effects, the economists say - but they are watching carefully.

"Where construction goes, the broader economy often follows. Expenditure on construction (which comprises 12% of GDP) is very cyclical and tends to have a strong correlation with aggregate economic activity. Of course, historically this correlation partly reflects movements in interest rates, which impact both construction activity and GDP more broadly. And that is not a factor this cycle, so the usual relationship is unlikely to hold – a classic example of correlation not implying causation. But there are other reasons that these may move together, not least the degree of confidence in the economy more broadly. 

"We continue to see the economy growing at 2½-3% in coming years, with fiscal stimulus and income growth (in part related to the elevated terms of trade) providing impetus and the RBNZ willing to step in if necessary. But there are downside risks to this outlook, and difficulties facing construction firms highlight that it is not all smooth sailing for the industry – or the broader economy – at present, and the activity outlook is looking a little less assured." 

Employment in construction-related jobs currently sits at 250,000 people – a hefty 9% of total employment in New Zealand, the economists say. And MBIE estimates that there is a shortage of 30,000 people in the industry.

"Yet simply hiring more people is only half a solution when it comes to expanding capacity.

"Productivity in the industry has been very poor over this entire business cycle and this means that even though demand is strong, the industry is struggling to keep up and produce efficiently, with proportionately more labour hours required to get the job done (figure 2).

(Note: This graph above has been corrected from an earlier version)

"It’s not a question of a lack of productivity growth: productivity has fallen. A lot. Building activity levels are comparable to those seen at the height of the boom in the mid-2000s, but employment in the industry is 25% higher."

In previous periods of strong activity, the industry has typically relied on immigration to increase activity, the economists say. And there is still a significant inflow of migration into construction-related occupations.

"However, sourcing more people is only part of the solution to push capacity higher when the marginal production of each new worker is low." 

The economists say low productivity growth is a problem that has affected the industry for a number of decades; construction-industry productivity is poor compared to that of other industries and other countries.

"The Productivity Commission has written about this at length and there are a number of issues at play: small scale (in part due to lack of large land parcels); not enough innovation (to simplify supply chains and deal with backlogs, plus make tendering processes competitive and efficient); and lack of skills amongst those entering the industry or looking to progress their careers (eg into management). Another factor is likely the widespread move to contracting out more and more of the work, requiring ever more complex coordination between operators on large building sites and yet a chronic lack of experienced and suitably qualified site managers. 

"But addressing productivity issues in construction is not just an industry problem; the Government has an important role to play. It can ensure that when it is the contractor, risk is shared appropriately. But more broadly it has a role in setting regulation, ensuring that sufficient usable land is available (helping to smooth boom-bust dynamics), that the industry is competitive, and that necessary infrastructure is in place.

"Transport infrastructure, for example, is an essential ingredient for supply chains to run efficiently. Likewise, regulation to ensure that the industry is competitive is important; lack of competition in the supply of building materials is reportedly an important contributor to elevated costs."

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30 Comments

Companies in NZ are not usually short on technical knowledge but their decision makers are light on modern management techniques as seen in recent project failures (not limited to construction).
I know getting an MBA or EE from a half-decent business school does not necessarily equate to good managerial skills but having technical experience alone does not either. I have seen many brilliant technical experts struggle with putting together satisfactory business cases and project bids, mainly due to optimism bias and lack of a commercial mindset.

Formal management training won't necessarily teach you communication and leadership skills but will at the very least force you to read a few books on financial management, pricing strategies etc.

It's the oldest story: the 'carry' is what does 'em in. What feeds the 'carry'?

  • The need to make payroll every Wednesday.
  • The need to pay subbies, suppliers, , consultants, financiers et al 20th of next month.
  • Time taken awaiting consents, inspections, answering related questions - all regulatory stuff where the Regulators operate at their own glacial pace, and with zero notion of Time = Munny
  • Non-productive on-site time: the daily Elfin Safety meetings; coordinating subbies, getting substitutes when subbies, transport, logisitics or deliveries go tits-up; time and noise restrictions which can affect any of the above as to hours left in the day.
  • Pure cost inflation as the next JIT delivery of imported material turns out to be 5% more expensive because the dollar has dropped and there is no FX hedging in place.
  • Pure non-productivity for some labour units on the Monday after the weekend test (beer if yer lucky, P if yer not).
  • Squeezes and push-backs from the suppliers, customers and financiers
  • Site accidents and the Incident Reports, for everything from a paper cut northwards.
  • And still to come if'n yer in one a them Rilly Lucky industry categories: Compulsory Collective Labour Agreements which take away yer wiggle room on unit costs

Still wanna bet the farm and take up Construction?

You forgot

Getting sucked into the hype and paying far too much for the land in the first place.

Well that is a scary graph. It looks like productivity has dropped from 21 sq metres to 13, a drop of 38% according to my calculator. So much for computers enhancing productivity. Maybe I pressed the wrong buttons.

It's all the time that gets lost in meetings where the interpreters have to repeat things 10 times a day in several different languages. Works with McDonalds and fruit picking but not so good in construction.

Residential and noresidential are entirely different techniques and the data should be seperated out.
Ive watched both and I would say as a generalisation it is due to improved heath and safety and job specialisation.
Also increased use of insulation and floorings such as tiles. Every house needs a roof of course but the chippies used to put it on...
Per sq metre may not reflect complexity of surfaces...

The inspector used to show up and sign it off from the driveway if he knew you well. It is so over the top now, in conversations I have had with a few builders, compliance has added around 40% to labour costs. I trained as a QS so have a reasonable idea, what builders have to go through these days is mind boggling.
Health and Safety in my opinion has got to ridiculous status, it is nearly illegal to get out of bed without a meeting.

They are far too bullish.
The sector could well be on the edge of collapse.

I tend to agree. I import and wholesale goods to the sector. The last 3 years have been insanely busy, I have had some exposure in a couple of small fails, we are now extremely tight with terms. Im seeing and hearing way to much never fail, oysters and caviar behavior.

A graph of construction cost versus labour hours may be interesting, for two different sectors...

Simply , there will be NO increase in construction activity from current levels , because this Government has made a total shambles of things .

First home buyers are sitting on thier hands waiting for a Government to deliver ............... they cant deliver at the prices they have promised

Developers are circling like vultures expecting sure -fire profits from Government contracts

Existing builders are struggling with all the policy uncertainty .

The cartel supplying materials will not cease its nefarious business practices voluntarily

And Chippies keep charging more than Doctors

I could use stronger language ,(and David Chaston would ban me for life ) , but in plain language its a huge .....-up , and the Government is 100% to blame

Are you really suggesting that this mess is solely due to the actions of a 10 month old Government? Set aside your fanboy-ism for a moment and realize how ridiculous your statement is.

I get that you've probably done well out of past National Governments, the consequences of this success is your adult kids are stuck living with you because they cant afford a house themselves. Oh well, must be Labour's fault too?

@nzdan , yes the trend over the past 10 months has been of people waiting for the Government to do what it said it would do .

The level of expectation is so great , that the whole system is freezing up while we wait for clarity and a clear concise well documented policy on housing by Government

It’s a very one eyed view, people being strapped to their seats for 10 months twitching and itching over every minor detail. While I’m not praising Labour for their execution so far, at least they are seen to be making an attempt. I’ll judge them on their performance at the end of their term and vote accordingly, just like I did National after voting them in for 9 years of inaction.

the charts seem to indicate the productivity decrease from around 2008.

What about the charts where unemployment seems to rise under National lead governments? It's a strange phenomenon, i thought businesses were more confident under National governments so they'd hire people and invest and stuff.

https://www.interest.co.nz/news/95092/figures-stats-nz-show-unemployment...

NZdan - thought maybe it might be something to do with the voting public tipping out poor performing Labour Govts just as they're about to see the S**t hit the fan e.g. in recent time 1999 & 2007 ?

Yeah you could be right, I did have that thought in the back of my mind. So you're basically suggesting that when things go bad you can lay the blame on the previous government due to some lag effect? The voting public could see that unemployment (which had reached a low point of 3.3% in December 2007 and 3.8% in June 2008) was going to skyrocket so they voted in National to help reign things in?

Who do I blame if the economy tanks within 2 years from now?

NZDan - From 2000 until their demise in 2008 Labour ramped Govt spending as a per of GDP up to nearly two decade highs as they attempted to buy votes at the end to remain in power. In doing so, yes they got unemployment down but at the expense of other things - they pushed inflation above 3% and touched 4% in 2008, and in response the RBNZ as is their mandate took the OCR to 8.25% and crushed many borrowers, including mums & dads - by 2008 NZ was leading the world into a recession before even the excuse of GFC, and the voting public binned them.

The next two years ? as it was with National in 2008, it was their job to make the pain as minimal as possible and in fact lead the world out of recession with growth rates above 3.00 - 3.5% - my verdict on Labour will be how they manage what will likely be a much much lesser event (hopefully) - time will tell, but at the moment they're showing no signs of ANYTHING that will drive growth other than the unsustainable short-term hand-out to working for families etc.

Thanks for that. Food for thought from my end.

Well said !!!

The govt are not 100% to blame.
The SYSTEM is rooted and it has been screwed up by successive governments of both colours, as well as greed and incomptence in industry.

To be frank, most people can diagnose themselves in 30mins using google. Chippies in NZ normally work outdoors in all seasons. No amount of cut-n-past will build a house.

I respect doctors, surgeons, lab techs, scientists, etc. I also respect chippies who work extremely hard and in uncomfortable conditions - they have business and living expenses too. Without housing I dare to say many reading this would be looking worse-for-ware.

Boatman

You're misfiring again.. The fault's lie with the last government, the Aussie banks and complete lack of oversight from the Reserve Bank, all of whom were enjoying the best daydream that they've ever had!

We've been well pumped and are now running the risk of being properly dumped!

Nic

Pretty sure there is a factor of 100 or so error in that graph. Ie maybe 0.2m²/hour labour

What happened? 2004 was the leaky home crisis year There was a massive fall-off in residential consent rates after that down from 2500/month in 2004 to a low of about 1000/month in '09. This graph seems to tracks that almost identically (divide by 100) with building consents during that period - almost like there was a fixed amount of labour with less houses being built - perhaps all that labour was doing renovation or leaky building fixes? Would earthquake repairs be counted as new build square meters?

A builder I am friendly with tells me that the council consenting and inspection process costs and delays only started to get totally out of control during GFC, and more recently health and safety regs have made it even worse. So perhaps a lot of the drop in the last decade can be laid at the feet of excessive regulatory compliance costs?

I hate to say it but there is not one page in the BCITO training manual that is focussed on anything to do with basic management of finances, personnel or otherwise. Innovation on a building site tends to come in the form of a new way of stacking the left over bricks to be used on the next job. You certainly won't find anyone extolling the virtues of time & motion studies or theory of constraints to boost onsite productivity...

Chinese whisper of late talks about another major construction company to come down in flames ... lots of subbies are refusing to do any work for them ... delays and costs are eating into their profits...oops

Building and contract prices will shoot up by at least 10% to accommodate risks as the industry team up to clean the mess.

Expect KB prices to follow suit, PT will either use taxpayers money to swallow the difference, or he will put prices up by at least $50K per unit !!

Watch the space - it will be ugly.

This industry has been arrogant for ages, under performing for ages, over priced for ages and now unprofitable for who knows how long. Materials are way too dear (by half) labour is overpriced and under delivered and recent regulations have just sucked whatever was left out of whatever was there in the first place. And I only know about residential building. God knows about commercial. Perhaps he's the only one that does?

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