Your Money and careers writer for the NZ Herald

Property Report: Building costs to shoot up

Photo / Getty Images
Photo / Getty Images

It's expensive to build in New Zealand and it's only going to get worse. With consents booming, more and more tradespeople and materials are needed, and they're going to cost.

Just ask would-be Glen Eden resident James (not his real name), who has spent more than $232,000 on council fees and drainage before pouring a single drop of concrete for the slab on his modest home.

James, who just wants a home "for my little family" found, thanks to a shortage of drainlayers in Auckland, the cost of installing his first and then a subsequent manhole leapt from $3000, in 2014 to $6500 this year. And his engineer said he'd got a bargain.

QV's latest costbuilder data shows the average cost of building a new home in New Zealand's four largest cities rose by 21.09 per cent since the previous peak of 2007, and 1.66 per cent in the year to May 2016.

The highest increases in costs have occurred in the large house category (between 200-600sq m) with the price of building a house this size up 34 per cent since the previous building boom in the lead up to the peak of 2007.

The costbuilder data is produced for the property and construction industries to enable them to budget for building projects.

The cost of building a home dropped after 2008, following the global financial crisis. It then jumped significantly between 2011 and 2012, when the Christchurch rebuild started, says Andrea Rush, QV national spokesperson. That year the cost of building a standard 90 to 130sq m sized home jumped by 21.63 per cent in Christchurch, 14.29 per cent in Auckland, 11.02 per cent in Wellington and 10.20 per cent in Dunedin.

A shortage of drainlayers in Auckland meant the cost of installing one manhole and then a subsequent one leapt from $3000, in 2014 to $6500 this year. Photo / Getty Images
A shortage of drainlayers in Auckland meant the cost of installing one manhole and then a subsequent one leapt from $3000, in 2014 to $6500 this year. Photo / Getty Images

Costs have continued to rise since then and show no sign of abating. Infometrics chief forecaster Gareth Kiernan predicts that residential building-cost inflation will average 5.2 per cent per annum over the three years to March 2019 -- well above the Reserve Bank's annual target of 2 per cent inflation across all types of consumer prices (inflation currently sits at 0.4 per cent).

Kiernan says that home building consents are set to hit record levels by 2018 and with the sharp lift in building activity will come side-effects thanks to "intense pressures on construction sector resources fuelling increases to building costs".

Infometrics is forecasting a 39 per cent increase in the number of new dwelling consents over the two years to June 2018, taking consents to an all-time record high of 40,044 a year.

That's up from 13,000 in 2012 and around 29,000 currently.

"But even with these additional incentives, we see a risk that activity will struggle to expand to the extent that we are predicting, which would further exacerbate cost pressures," Kiernan says.

Labour costs

Although home owners often complain about the cost of materials, the real problem, say Rush and Kiernan, is labour.

"I was up in Auckland talking to people and they are really struggling to get site supervisors, managers, drivers to get the product to market, concreters etcetera," Kiernan says.

Recruiter Hays is seeing this on the ground with experienced construction candidates remaining in such high demand that they often receive multiple job offers.

"Quantity surveyors, site managers and good skilled trades and labour are among the skills in such short supply that employers will move quickly and offer career progression in order to secure their preferred candidate," says Jason Walker, managing director of Hays in NZ.

"Most regions in New Zealand are experiencing increased residential activity while the unprecedented investment in commercial construction and transport projects across Auckland is adding to the significant skill shortage," he adds.

Photo / Getty Images
Photo / Getty Images

Materials

Although cost pressures on materials are nowhere near as evident as the increases in labour costs, Kiernan says, prices are starting to go up after a period of no increase.

Suppliers' margins were squeezed pretty heavily from 2009 to 2011/12, he says.

And despite popular opinion, material costs are probably not even returning to where they were previously.

Malcolm Fleming, chief executive of the New Zealand Institute of Builders, concurs that material costs are set to go up.

"Although there is significant variation across various product categories, an increase of between 3 to 4 per cent year-on-year is predicted in some quarters," he says.

It's not simply price increases that have building products customers up in arms. They complain that products such as plasterboard and insulation cost far more than equivalent products overseas.

Tony Sewall, a former head of Ngai Tahu Property, the biggest developer in the South Island, told TV's 3D programme he was paying about 30 per cent more than in Australia for building materials and as much as 60 per cent more than the United States. He added that the product in the US was of better quality.

Scratch the surface of building costs and you'll quickly hear complaints about Fletcher Building and Carter Holt Harvey. TV show 3D concluded that this duopoly was one of the big issues for materials costs in New Zealand.

In 2013/2014 the Commerce Commission investigated allegations that Fletcher Building subsidiary Winstone Wallboards acted anti-competitively to maintain its market position in the manufacture and supply of plasterboard. But the commission concluded in 2015 that Winstone had not breached the Commerce Act 1986.

Still, stories of unfair advantage arise from time to time. A residential construction sector market study by MBIE in 2013 commented there was a possibility of "capture" of both the Standards making process and the Branz product appraisal process, by Fletchers and Carters.

"This may occur where dominant industry players are able to utilise the presence of their employees or associated persons, or ability to influence non-associated individuals, to obtain some form of unfair advantage."

Researchers commented that the sorts of advantages that could result from "capture" of a regulatory or quasi-regulatory process related either to making it easier for the dominant players' products to be used in the market, or making it more difficult for competitors or potential competitors to have their products accepted by Branz.

Moreover, the study said, Branz may have a general tendency to favour existing materials and brands simply because that is what the industry knows best.

When it came to new methods of construction and materials, the report said, "Branz may lack the expertise to engage with new construction technologies. Any potential bias of this type could result in negative outcomes for competition from new products or materials."

Smaller players sometimes complain that it's too expensive to get their products through the Branz standards process, which the Herald was told could cost tens of thousands of dollars for certification and, even then, it was difficult to get suppliers to stock products they saw as a competitor to their own products.

Certification bodies and suppliers are, of course, damned if they do and damned if they don't.

Regulations regarding materials tightened as a result of the leaky-home crises. As a result those higher hurdles constrain the ability for competitors to emerge and, as Kiernan says, to syphon demand to offshore suppliers.

The newer generation of builders, says Kiernan, sometimes source product direct from overseas that doesn't require Branz certification, bypassing the likes of Fletcher Building subsidiary PlaceMakers.

"If you look at the price of [product] in New Zealand in terms of wholesalers and retailers it is relatively expensive."

He adds: "New builders don't necessarily have the historic relationships some of the older operators have with the materials suppliers such as PlaceMakers," Kiernan says.

By importing direct, building companies control costs on materials as labour gets increasingly expensive.

Wider picture

There is more to building cost inflation than simply labour and material cost escalation. Other significant cost increases can be found in health and safety compliance and higher levels of specifications being imposed such as higher seismic loads, Fleming says.

"One factor strives to achieve a safer working environment, while the other promotes a higher performing building." Both, Fleming says, are desirable outcomes, but there is a cost.

Fleming adds that although the construction industry is running at capacity, margins remain tight for design consultants and contractors alike. Although this appears to be counterintuitive, he says, it is a reflection that a developer or owner is only able to pay so much for a building.

"Given that there is a limit to what can be paid, the sector's leading practitioners are investigating techniques that assist in reducing the costs of constructing a building, and the ongoing ownership of the resultant asset," says Fleming. Property and construction practitioners are very focused on this challenge, he says.

New Zealand could become more efficient at building, Fleming says, by using Building Information Modelling (BIM). "This technology promotes collaboration across the design consultants, contractors and suppliers," says Fleming. "Done well, BIM reduces error rates and costly rework."

COSTLY RED TAPE

Whenever the cost of building is mentioned, council costs for building and/or resource consent aren't far behind. But many people complain that Auckland and other councils' bureaucracy makes building unneccassarily expensive.

West Aucklander James (not his real name) spent $219,817 before a single drop of concrete was poured and says, if he could start again, he would simply buy an existing house.

His engineer told him to expect to pay $110,000 to $120,000 before the house building began but the costs ballooned out by an extra $100,000, some of which he puts down to the "council being a real pain".

"The council is so slow," he says. "They tell you it's 20 days, and even though my engineer was running the job and knew exactly what he was doing, the council kept asking more questions."

James felt the council's officers were playing the system to make it look like they were meeting their obligations , but weren't. "The hoops you have to jump through with the council are crazy."

When he questioned his contact at the council, he was told: "Life's hard".

Auckland Council says it's working to improve the system. Penny Pirrit, director of regulatory services, points to Beacon Pathway's work on the cost of building affordable housing in Auckland. Council fees at 4 per cent were only a small fraction of the overall cost of building a house although the 4.1 per cent for professional fees will be in some part due to consent activity. The main costs were construction: 51.4 per cent, land: 25.8 per cent and GST 9 per cent.

- NZ Herald

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