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The construction industry's grumpiness may be the result of a forced shift in focus towards more affordable housing, says Greg Ninness

The construction industry's grumpiness may be the result of a forced shift in focus towards more affordable housing, says Greg Ninness

By Greg Ninness

The health or otherwise of Auckland’s residential construction industry has been a topic of pointed debate following the release of the latest ANZ’s Business Outlook Survey, which showed a sharp drop in residential building intentions, particularly in Auckland.

That was in sharp contrast to the latest building consent figures, which were released the following day and showed new dwelling consents hit a record high in February and were particularly strong in Auckland.

The apparent contradiction between the two sets of numbers was picked up in comments by Deputy Prime Minister Winston Peters and also prompted economist Rodney Dickens to accuse some of the ANZ survey’s respondents of political gamesmanship by framing their responses to produce a particular outcome, which in turn produced a stout defence of the survey by ANZ’s current and former chief economists.

However when taken together, what the ANZ survey and the building consent data may be signalling is that Auckland’s residential construction industry could be at an important turning point.

There is no doubt that Auckland’s new dwelling consent numbers have been at very strong levels since the second quarter of last year. And unless the consents for March are disastrous, the numbers for the first quarter of this year should also be robust.

But a closer look reveals some subtle changes.

If you break the consents down by the main dwelling types of stand-alone houses and townhouses/units, the figures show that the average construction cost per dwelling, and the average construction cost per square metre for both types of dwellings, peaked in the first quarter of last year and have since eased back. Meanwhile the figures for apartments are a bit lumpier but are also down from their peaks.

For example the average value of new dwelling consents for stand-alone houses in Auckland peaked at $488,563 in the first quarter of last year and had eased to $441,172 by the fourth quarter. And the average value of consents for new townhouses/units in Auckland peaked at $296,121, also in the first quarter of last year, and by the fourth quarter had eased back to $273,754.

It must be said that the trend is still reasonably tentative, but what it may suggest is that developers and the builders and suppliers they use, are doing less work in the middle to upper end of Auckland’s housing market and are starting to do more in the middle to lower end.

That would fit well with other figures which suggest that Auckland’s overall property market is easing from the top, with sales and prices softer in the middle to upper end of the Auckland market, while the middle to lower end is more resilient because it’s supported by pent up demand for affordable housing.

If developers and builders are finding demand weaker at the top end of the market it would make sense for them to shift their focus more towards the affordable end, where demand is strongest.

But if there’s still plenty of work to be had, why would the construction sector be so grumpy, as ANZ’s survey suggests?

There could be several reasons.

Firstly, changing a business’s focus from one end of the market to the other end is never easy.

A shift away from customers who are highly paid and/or have high levels of equity and want a high end product and focussing your efforts more towards customers with average incomes wanting a more affordable product is never going to be easy, regardless of the industry you are in.

Even for experienced players, producing affordable housing in the Auckland market and making a decent profit from it is going to be tough. That's because costs remain high and although interest rates are low, securing funding for projects can be tricky.

So even though the order books might be full, the construction sector still has plenty to grizzle about.

However as stated earlier in this piece, the trend for lower average and per square metre construction costs evident in the recent consent figures for Auckland are still pretty tentative and it will probably be another two or three quarters at least before we will see if the trend to more affordable housing has any legs.

If things are moving that way, it’s likely that some firms will cope well with the change and others won’t, so the shift won’t be without pain.

Which means the grumpiness that’s already evident in the sector is probably going to get even louder.

Because while tradies can be very, very good at what they do, when it comes to whingeing they could give the poms a run for their money.

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I had a protracted phone call with a friend that is a North Shore/Rodney based builder yesterday. Credit cycles are something really beyond his understanding, but he tells me work is definitely slowing up for tradesmen. I'd be pretty worried about the commercial sector personally, having lived in Auckland through the post 87 carnage. This has the same feel to the buildup.

Nearly half a million dollars to build a house. Not surprised things are settling back.

Very good and factual article..

This is exactly what I have been witnessing over the last couple of months, ie. There are more bigger developments catering to modest houses rather than individualized ones catering to the top end. Had a chat with a developer almost completing a 5bed, 4bath.. hes concerned that he will not make much once Sold, as he has already dropped the price thrice.. he has also let go of 3 of his builders as he can't adjust to the current market...

He plans to move to Hamilton as he still sees growth of larger properties there.. I got the feeling if he can't recover his money, he'll go bankrupt and set up shop in Hamilton

That will be interesting for him, quite a bit of competition down here for brownfield sites and in many instances the section sizes have shrunk dramatically in new developments so doing big rooflines might be a lot harder than he realizes.

There could be a dozen contributing factors leading to a downshift of activity at the topend of the market. The ban on foreign ownership and the tightening up on moneylaundering laws are two that I would underline in bright red ink. Having personally been involved in building projects where the developer was from P.R.C. and paid in cash for everything... I can say for a fact there has clearly been a big hose pipe closed off and its impact may well be showing up. I can't imagine how much revenue has neen missed by the IRD because of this kind of thing.

Greg I was worried when I read your heading. I thought it inferred that the government had 'forced' that direction.
But then I read the article and you rightly state, effectively, that there is only so much demand for high end expensive housing. But there's huge demand for lower priced housing. So it is the market that is 'forcing' this.
And the market is really going to struggle, and not necessarily through any fault of its own. It's just really really hard, mainly because of the cost of land, and construction. It's only partly about know how.
So, I'm pretty pessimistic, to be honest.

... it's a very good contest ... who are our greatest whingers ... tradies or farmers ??? ... teachers would be in the mix too , except for the fact that they really do have good reasons for whining more than a Marlborough viticulturist ...

My money's on the farmers ... they'll whinge it's too hot , too dry , too wet , too cold ... they'll whinge from sun up , all day , until the cows come home .... and who's gonna milk them when they do !

I wanted to comment on the David Norman article, but it seems we can't, so I'll say it here.
It's another flawed piece from the council economist. Another self back pat on a policy initiative.
He attributes an uplift in PT use to the regional fuel tax. Correlation does not equal causation. When the PT uplift occurred, there was a big spike in petrol prices, regardless of the tax. As an economist, he should be acknowledging this.

Sorry. I didn't realise the Comment setting had not been activated. It is now.

Thanks David, loving the new look website.

It would be even better if you stopped publishing articles on the Christchurch shooting altogether, thus removing the need to moderate them. I come here to get away from the seemingly endless media commentary on the subject, its become tiresome and annoying. Can we just stick to financial news please?

David, I am trying to locate the David Norman article that Fritz is referring to. I can't seem to find a search box to search for the article on the home page. Not sure if I'm missing the search box or if it is not available in your new format.

Here it is: We are working on restoring the Search function.

Thank you David.

Isn't using the term"the poms" and stereotyping them as "whineging" a form of casual racism?

This doesn't sound like diversity and inclusion to me.

" pale and stale poms" would be totally OK though.

Trades move about and always have. It goes with the business. I can report from the thought leading sites in New Zealand, ie Nicholls Cafe and Fusee Rouge in Cromwell. Heaps of builders arriving as Christchurch winds down. An extra dozen Ford Ranger utes in the town each week.
WiL this work out well ?

First off, what is the time lag between intention to develop a block of land and being issued a building consent? Its possible that 6 months ago builders believed the rubbish about there being an undersupply of housing, and in conjunction with Labour's "we'll buy it if you can't sell it" welfare policy for developers (aka Kiwibuild) its likely they all rushed to submit building applications. Now they are finding they can't sell what they have already built, and its likely we will see the same as in Australia, huge numbers of consented developments being mothballed.