KEY POINTS:
Considerable media debate has focused on homes becoming less affordable. The issue is not new, as New Zealand's home affordability levels have been deteriorating for some time. And it has become prominent politically, with Parliament's commerce committee inquiry into housing affordability.
Housing affordability has a huge impact on the lives of all New Zealanders and should be a concern to us all. According to Massey University's quarterly surveys, affordability levels have been declining since 2001. Last year, affordability dropped by 7.3 per cent and it is fair to say that in our major cities it has plummeted at even greater rates.
According to the survey, the rise in house prices has consistently outstripped gains in salaries and wages, and coupled with interest rates rises, this has placed the dream of home ownership out of reach for many young New Zealanders.
The question is, what factors are driving this trend? To date, the responsibility for the situation has largely been attributed to buoyant economic conditions, net migration, increased rental returns in some areas, and the property boom in the Auckland region filtering through to other regions.
A report published by Auckland City Council this year sought to lay some of the blame - incorrectly - on building cost increases in New Zealand. The report cited the higher costs of building and building materials in the Auckland region as a significant driver of rising house prices, and said costs were much lower in comparable Australian cities.
While many of the report's findings have subsequently been refuted, it has at least focused discussion on the housing affordability issue.
As Registered Master Builders we are confident our building materials and labour costs are competitive compared to other countries, and we know we build for similar price levels. A significant-volume builder in Canterbury tracked house construction costs from 2002 to this year on the same base house plan and found materials and labour costs have reduced as a portion of the total cost of building a home.
While labour and materials increased by nearly 30 per cent over the period (not adjusted for inflation), the cost of land and local council infrastructure levies more than doubled.
In 2002, labour and materials costs comprised about 54 per cent of the total cost of building a home. Land and infrastructure levies accounted for about 33.5 per cent.
But by this year, land and infrastructure levies were 43.7 per cent of the total, fractionally higher than labour and materials (43.5 per cent ). The most significant increase was in land cost, up from $75,000 to $150,000 for an average section - with an even higher cost impact in Auckland.
The commerce committee inquiry will look at the availability of land, the way prices of housing are being driven up and the cost of building materials. Claims that timber and building products such as toilets and vanities cost more in New Zealand than in Australia or Britain have been greatly overstated.
While some products are dearer here because of our market size, New Zealand prices are fairly competitive.
So, what are the key components causing the reduction in housing affordability? We think there are three main reasons: rising land costs, increased infrastructure levies/fees and compliance costs, and labour and materials costs.
But the proportional impact of these cost drivers is not equal. Land costs contributed more than 50 per cent of the increase in building a new home over the past five years, and labour and material costs have contributed about 20-25 per cent to the increase.
Since the leaky building crisis of a few years ago, the Building Act passed in 2004, and a range of associated industry regulatory changes, have meant a generally higher level of bureaucracy: higher consent fees, more consent delays, substantially more paperwork. That higher level of rigour was needed - the trick is to make sure the demands of greater bureaucracy aren't excessive.
Designers and builders around the country say local authority red tape is much higher than it should be, and considerable work should be done to reduce the time spent on this part of the building process.
Concerted efforts are being made by a number of players - the Department of Building and Housing, local authorities, designers, builders - to improve the efficiency of the process.
We're looking forward to getting to the point where clear, consistent and more streamlined consent processes exist so we can get on with the real job of building houses.
The next-biggest cost imposition is that of regulatory fees charged as part of the consent process. In many parts of the country, particularly in the larger centres, a standard $200,000 home on a $150,000 section will be charged $30,000 in regulatory impact fees by the relevant local authority - apparently to pay for the infrastructure cost that a new home imposes on the local community.
While no one begrudges the need to pay for a new home's impact on community infrastructure, charging $30,000 (and more) is an excessive burden.
Home owners were able to challenge the fees under the Resource Management Act when it was thought they were too high but recently the charging power has been moved under the Local Government Act and the ability of anyone to appeal against unreasonable fee levels is limited.
There should also be much clearer guidelines on how regulatory impact fees are charged, so that they better match a home's infrastructure impact.
Finally, perhaps the biggest impact on overall house prices in the past five to 10 years has been the huge rise in the value of land in urban centres.
Average section prices have doubled in the past five years: a section used to take up 25 per cent of the overall home cost but now it can be as much as half. The main driver of land prices is supply and availability - where supply is scarce, land prices go up.
In Auckland, the Regional Growth Strategy has put a ring around greater Auckland, inherently making all land within the ring more valuable.
As land opens up, it has a huge bearing on land prices and work volumes. For instance, considerable tracts of land have been opened up in recent times on the North Shore but in West Auckland, the amount of new land has been constrained.
But New Zealand is not short of land available for residential development and more has to be done to free up land, so that section prices can come down to a more reasonable level.
If we can fix these things, we can reduce the current cost of an average new home from $400,000 to nearer $300,000 - and make a positive impact on housing affordability.
* Pieter Burghout is chief executive of the Registered Master Builders Federation.
