Bruce Kohn: Large-scale importer would not get building materials cheaper

In contrast to Australia's often standardised housing developments, the New Zealand market is dominated by demand for more costly one-off builds. Photo / Duncan Brown

Opinion

COMMENT: Absolutely, positively bollocks, is the answer to claims that New Zealand building materials and product prices are 20 to 30 per cent higher than in Australia. The claims are misleading and ignore the realities of global competition in the two markets.

Both countries reflect variations in material costs between regions so that prices vary between Auckland, Tauranga, Wellington, Christchurch, Sydney and Melbourne with some up and some down according to the material purchased. Promotional and volume discounts apply in both Tasman markets.

Individual product variations can be significant. For example a standard 10mm plasterboard panel sells in New Zealand at between $6 and $11 depending on the place of purchase. The variations on the same product in Australia are even more pronounced.

Higher prices than in Australia come to bear in New Zealand for concrete and timber which trade executives say arise from greater costs of cement and concrete distribution and global demand for NZ wood, particularly from China.

Overall New Zealand suppliers report that they are absorbing raw materials cost increases in order to compete with importers. Their assertions are backed up by analysis of Statistics New Zealand data which shows that between 2009 and the middle of last year building materials prices have risen at about the same rate as the consumer price index — around 14 per cent.

In contrast, the house price index shows a lift in the same period of 57 per cent. Labour costs in the construction industry rose about 17 per cent. An increase of about 40 per cent over the past five years in sub-contractor rates reflected market dynamics as the demand for new housing took off

Our understanding from industry analysis is that material costs for supply to developments in New Zealand's major cities are in many cases cheaper than in Sydney and slightly more expensive than in Melbourne. This applies particularly to urban town houses and apartment blocks.

There are, however, very significant differences between the two markets. One which contributes heavily to the perception of lower material costs in Australia is the prevalence of standard designs in large-scale stand-alone housing developments where differences in the finished structure come down to the consumer having choice only in respect of colour of the completed build and the quality of interior fittings.

This drives efficiency in the supply of windows – all of standard size and therefore less costly – and the use of standard size wood panels throughout the development, again a cost-cutting measure.

The New Zealand market, however, is dominated by demand for design unique to the structure being built. This means windows of varying sizes have to be provided, with additional cost being incurred by the manufacturer. Wall panels and frames have to be factory produced as more expensive "one-off" units. Efficiencies available to the manufacturer from long computerised production runs of standard sizes are nullified.

Australia also benefits from efficiencies in transport and the higher demand from a much larger population base supports larger-scale housing developments than in New Zealand.

New Zealand materials suppliers deal with high transport costs — deliverers of materials to a site in Auckland now charge by the hour rather than a customary flat rate that ruled before congestion of the city's roads became an issue.

Delivery from the major manufacturing and supply bases in Auckland to the South Island to reach what are, by global standards, small markets is also a relatively high cost burden.

Claims that a letting of large-scale construction contracts to an offshore company with its own materials supply chain would bring about a significant reduction in materials prices ignore two supply realities. The first is that the market for materials is open to all comers from abroad. The second is that the New Zealand merchant chain already sources products and materials from global networks.

A New Zealand construction contractor allocated the commercial benefit of a long-term large-scale residential development contract would have available to him the opportunity to access locally volume supply arrangements at highly competitive rates.

Would such access mean an equally significant fall in the cost of housing provision? Probably not, because of two factors. The first is that in Auckland, for example, materials make up only about a fifth of the cost of a stand-alone house, compared to more than 30 per cent for the land and infrastructure costs and a further 16 per cent for regulatory charges and GST.

The second factor is the housing market itself. A developer whose total cost of construction, including land, materials and labour, is $450,000 is unlikely to sell the dwelling with a $50,000 profit margin if a similar house on the section next door is selling for $700,000.

Greater standardisation would keep construction costs down, especially in the residential sector. It would help increase efficiency at computerised frame and truss plants which supply most of the country's on-site construction. But land markets on both sides of the Tasman remain the largest factor in price escalation for stand-alone, townhouse and apartment dwellings.

• Bruce Kohn is chief executive of the NZ Building Industry Federation which represents the interests of manufacturers, retailers and importers of building products and materials.