The new residential building market is facing tough times. Photo / 123RF
The boss of one of New Zealand’s largest residential building companies has likened the recession gripping the country to the Global Financial Crisis and says without doubt there will be more business closures”.
Associations in the industry told NZME it was holding workshops for its members to navigate the headwinds and while the sector was used to the boom/bust cycle, construction faced more volatility than other industries.
Businesses like Auckland-based builders Scarbro Construction founded 27 years ago and Construct Civil had been put into liquidation and made headlines while other companies had laid off staff, pivoted, and put managers back on the tools to ride out tough times.
Classic Group director Peter Cooney said this recession was up there with the 2007/08 downturn and would have a huge impact on the building industry.
“Without question, there will be more closures. It is a highly frustrating situation when the country desperately needs housing but the economy is preventing progress.
“The construction industry needs reasonable stability to enable a steady flow of housing supply to market. The current situation is causing carnage, reducing supply further and driving up rents. We still have a housing crisis to address and this lull in progress is going to set us back even further unless the Government can fast-track infrastructure investment and bring land to the market faster.”
Classic Builders recently laid off 12 staff and predicted it would build about 400 homes in the next 12 months compared to 800 last year.
“Operating in a cyclic industry with highs and lows, we have been here a few times now. It takes an emotional toll on everyone when we have to reduce our team to match the reduced levels of work coming in.
“We have learned to be extremely resourceful, quickly pivoting our focus to where there is an opportunity, whether that lies in diversifying our services, creating new partnerships, or even moving project managers back on to the tools while we ride the low wave.
“We have to be extremely flexible and nimble, moving at speed to adjust multiple facets of our business to cope with the ups and downs of the market.”
In Cooney’s view, interest rates had risen too high too quickly and had possibly been too low in the first place while construction costs had accelerated at an unrealistic level.
“That needs to be addressed to make any kind of vertical construction a commercially viable solution.”
TK Homes director Tom Gerrard said it had pivoted due to the slowdown and was doing labour-only contracting to bigger companies in Tauranga and was currently building homes at a retirement village.
He had secured work until the end of the year for himself and two staff and said construction seemed to be “the first one to get hit”.
Gerrard was hopeful the situation would improve before his current contracts run out.
Build Rotorua owner Chris Reid believed longstanding businesses would be able “to endure the downturn a little better than the new kids on the block”.
“Obviously people are tightening up because they don’t want to spend copious amounts of money if the interest rates are too high. The market can’t keep growing and growing, it naturally has to come to a stop at some point and there are going to be staff layoffs and things like that.”
MK Build owner Mike King said his workload had picked up but he only had a small team and they mainly specialised in kitchen and bathroom renovations and decks.
“We don’t restrict the work we do and we also do insurance work and that is through the roof at the moment.”
However, he wondered: “If the big guys are getting pushed out of the stuff they are doing are they going to come and start looking for our work?”
King, who had been in business for two years, said luckily he had built up a loyal customer base.
Shaw Builders owner Dave Shaw said everyone was struggling a little bit and next year would be telling.
“We are okay till Christmas but next year is when everyone will find out whether it’s going to be good or bad.”
Shaw said it had one job fall over because the finance was too high but he did not believe it was all doom and gloom.
He had been in the industry for decades and believed Tauranga would fare better than other cities and high-end housing driven by cashed-up retirees had held its own.
Venture Developments director Mark Fraser-Jones said with record immigration into the country it won’t be long before demand begins to pick up again although he acknowledged the past few years had been challenging.
“We have seen a levelling off in interest rates, building material supply is back to normal and builders can offer fixed price contracts again with no need to worry about cost escalation.
“We are already starting to get inquiry out of Auckland which we haven’t seen for the last couple of years.”
Master Builders chief executive David Kelly said the sector was used to the boom/bust cycle and “have faced it for the past five decades”.
However, there were differences that included a gradual softening, which has given people time to prepare and the prediction this recession would not be as long.
The sector was the third largest contributor to GDP and sustained more than 540,000 jobs, he said.
“The peaks and troughs of this cycle are much more extreme for construction than the volatility faced by other sectors.”
During the GFC it took seven years for the workforce to recover but in Australia, where state and federal government policies offered greater counter-cyclical incentives, their housing slump was shallow and only lasted two years, he said.
“In the absence of a predictable and stable pipeline of work, the sector is unable to invest in innovation and/or workforce planning. This results in a sector dominated by small businesses, which are unable to develop the scale required to deliver once the recovery is under way.”
Its members were aware of the challenges and Master Builders was supporting them with learning and development to prepare for the changing cycle that had included providing guidance on good financial and governance practices.
“We stress to everyone in the sector to do the same.”
Some members had experienced a decline in sales but the residential order books were varied with others still showing a strong or steady pipeline of work, particularly for renovations, while commercial construction remains robust.
Kelly said if consumers were in a position to do so, it was a good time to build or carry out renovations as more builders were likely to be available.
New Zealand Certified Builders chief executive Malcolm Fleming said members had reported a distinct reduction in new inquiry generally, with the drop off most pronounced for new homes.
It was also building resilience amongst its 2300 businesses with the development of a Business 101 suite of workshops.
“This will reduce the incidence of business failure within the residential builder market, which reduces risk to the homeowner, as well as to the supply chain that provides the builder with goods and services on credit.”
Building merchants were now active in providing builders with quotes for single residential building projects, which they had moved away from doing and would mean flow on savings to the homeowner.
The Official Cash Rate increased by 25 basis points from 5.25 per cent to 5.5 per cent in May.
The Reserve Bank of New Zealand said at the time inflation was easing from its peak.
“Consumer spending growth had eased and residential construction activity had declined.”
House prices had returned to more sustainable levels, the RBNZ said.
Minister for Housing Dr Megan Woods said there was no doubt there were headwinds facing the construction sector as a result of global economic conditions.
The Government had been preparing for that by ramping up support for the construction sector that builds on the massive programme of infrastructure funding, land development and public housing building.
Developers could also apply for project underwrites through its Build Ready Developments pathway, which targets projects that include affordable housing, she said.
New Zealand Banking Association chief executive Roger Beaumont said retail interest rates reflect the wholesale cost of funding and the bank’s margin on top of that.
The cost of funding was driven by a few factors, including the cost at which banks can obtain funding from overseas, the cost of domestic funding such as customer term deposits in banks, and the official cash rate set by the Reserve Bank.
“Each bank also has its own risk management and lending policies and will assess each loan application within that framework. One bank’s risk appetite may be different from another so it’s worth shopping around.”
Stats NZ said that in May, 9719 new homes were consented in the three months to the end of March, compared with 12,333 at the same time last year.
Consents from councils around New Zealand for new residential buildings plunged 21 per cent in the March 2023 quarter compared to the same time a year ago.
Carmen Hall is a news director for the Bay of Plenty Times and Rotorua Daily Post, covering business and general news. She has been a Voyager Media Awards winner and a journalist for 25 years.
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