This article was first published on AUT's Briefing Papers series. It is here with permission.
Circa 2005-2006 the Auckland housing market was dubbed ‘unsustainable’ and a ‘dangerous bubble’. Six years post-Global Financial Crisis (GFC) we are in a very different place – in many ways a worse place.
The government response to the GFC was pressure on interest rates downwards, making expensive mortgages significantly cheaper, thus spurring house price growth.
House price inflation is sending Auckland (and to a lesser extent Christchurch) values to stratospheric levels.
It is a contagion that is spreading to other towns in the upper North Island. But perversely, despite the highest house prices and mortgages (compared to average wages) in New Zealand history, housing is largely more affordable that it was immediately pre GFC.
Auckland increasingly has little to nothing to do with the housing market in much of the rest of the country. Securing a modest starter home in Greymouth with an affordable mortgage? No problem. How about a residence close to the CBD and shopping in Wellington? Very reasonable.
But the media contains articles on a daily basis of how young, low income or critical worker families find it impossible to buy a home in our largest city.
The imposition of a demand dampening 20% loan to value ratio (LVR) limit on mortgages has made the difficult task of generating sufficient savings for a deposit yet more unobtainable for those not already on the property ladder.
Prior to the most recent spasm of the ‘affordability crisis’ in Auckland between 2012-2016, productivity initiatives were the ‘agenda du jour’ driving behaviour and new initiatives in the construction industry. Both government and the media have waded into this conversation. The principle axes of effort were in addressing construction process costs, planning, materials costs, productivity, skills, the regulatory framework and materials importation. These issues represent the usual pantheon of systemic construction problems always being raised. Huge efforts were made in targeting and addressing increasing granular issues for the construction sector producing. As a result, ever more verbose explanations of the problem have been brought to the public.
Sadly, we are in danger of producing the most precisely located economic shipwreck in the ocean of house building history.
Choices are made by consumers of housing – but also by its producers. It is not possible to force a company to produce more of its principle products. Just because a producer can build more, no one can compel higher production. The ‘producers’ of housing – i.e. builders, contractors, developers – in the construction sector want to have a life as well. They want to go on holiday, go fishing and all the other lifestyle choices that New Zealand is famous for. You cannot compel a commercial entity to accept more procedural, long-term and short-term risk than it wishes to bear. A critical point for all (older) builders is that they have experienced in living memory major housing booms and busts. Thus they will take on only that much work that allows them to continue to reliable earn a living without taking on board any more risk. If they build at a rate that forced down unit costs of houses they would in effect build themselves out of a job.
So let us assess the current issues in the housing market from the perspective of builders. Construction has had historically very poor productivity growth and has been extensively commented upon, by NZIER, among others. According to commentators in general and government in particular, this is a major element affecting housing affordability. Absolute rubbish. The reality is that productivity is not synonymous with affordability and never will be. Productivity is only important in affordability if a builder passes on the productivity savings to the customer directly. Efforts made to increase productivity actually only increases profitability of construction companies. Rationally, will a builder pass on all savings to a purchaser when they can charge a standard $2000-$3000/m2 rate? Is it unreasonable for a builder to sell construction services at a high price into a hot market? Businesses – especially builders – are not charities and in spite of the polemic feeling of ‘exploitation’, builders are operating in a free market.
Builder’s costs
Larger houses are more expensive to build because their costs increase lineally (i.e. on a wall by wall basis). However, as they grow on a side their floor area increases at a square function. Furthermore, the total living space (house volume) increases on a cubic function. The ‘fixed’ elements of expenditure – scaffolding, corner structures, windows etc – form a lesser component of the overall costs. Thus a bigger house can be sold for a lower unit rate (typically around $2k/m2 for a 250m2) at a greater profitability level than a smaller ‘affordable’ house (typically around $3k/m2 for a 120m2 home).
Perversely the economics of construction compel speculative builders to build the largest, most expensive house possible. Even more perversely those same economics drive builders to construct low density housing – single storey, stand-alone properties, that require less scaffolding and structures to support multi floor patterns. Similarly, individual members of the house commissioning public are incentivised to construct larger houses, since residual values are increased in the longer term and the unit cost per square metre added is relatively low compared to ‘affordable’ housing.
Builders have historically been at the bottom of the profitability pile, averaging around a 6-7% margin, with relatively high risk profiles and business mortality compared to the remainder of the economy. It is therefore no shock whatsoever, given that we are dealing with free market economics, to discover that all of the ‘affordable’ new dwellings in the much vaunted Special Housing Areas (SHAs) are not actually being constructed – to the point that they are being rescheduled for ‘normal’ housing. Cheaper affordable housing in less desirable areas are not as profitable for builders and therefore are not prioritised. It has been alleged that affordable homes in SHAs have translated into the land bank of developers instead.
Another mechanism for reducing builder costs for construction has been touted as being through the introduction of prefabrication. However, the history of the New Zealand construction industry has been strewn with attempts to improve productivity and reduce costs through the introduction of building systems and prefabrication. Unfortunately, the size of the market and the lack of scale inherent in our tiny market reduce the adoption of these measures in any meaningful way.
The net effect is that a minimal amount of new technology and systems are introduced, meaning that builder profitability stays low. The lack of profitability and low scale in the New Zealand construction market reduces investment in new technology. Additionally, there is a pervasively negative view of prefabricated building as being cheap, shonky and relatively low-value compared to the bespoke, low productivity housing solutions that are the norm across the sector.
Sadly, in the absence of concerted governmental action to make the market, we have conditions ideal and self-reinforcing to retain the status quo. We have societal needs crying out for increased cost effectiveness, better quality and faster construction rates in the house building sector throughout New Zealand. At the same time, we have buyer behaviour, government policy and technical solutions that (entirely rationally) leverage the slow, bespoke construction of entirely the worst types of housing necessary to solve our problems. If there was ever a market for a ‘how not to do it guide’ for housing development and policy, the New Zealand construction market in general, and housing in particular, has a great story to tell.
Dr John Tookey is Professor of Construction Management at Auckland University of Technology and head of Built Environment in the School of Engineering, Computer and Mathematical sciences. You can contact him here. This article was first published on AUT's Briefing Papers series. It is here with permission.
55 Comments
Beware! Dangerous fallacies in this article.
I agreed with most of Tookey's previous article but here he wanders off into dangerous territory. Dangerous because any discussion about the construction industry and construction materials/methods in relation to residential house prices is a red herring. It's all about the land. Let me say that again: it's all about the land.
Now that the average price for an Auckland residence is over $1m consider the breakdown of that valuation. Stand in front of that modest $1m property. Everything you see - house, driveway, lawn, trees, water and sewer connections, footpath, and street accounts for about $300K per lot (maybe a bit more). The handful of bytes in the LINZ computer that says you own the land the house stands on is valued at $700K. So, let's go for a Big Hairy Audacious Goal and make all civil construction 40% more efficient. Average house now $880K instead of $1m. Whoop-dee-doo.
If you go way out into the countryside - somewhere aesthetically pleasing like Mayfield or Hawarden in Canterbury - you can pick up bare land for about $2.70/m2 (irrigated even!). If you were to carve that land up for residential lots and have to give up some of the land for streets and reserves the actual cost of the land for housing lots would still be about $4/m2. Let's make these the measly but standard 600m2 lots (1/7 acre in old money). Cost to buy: about $2,400 land cost per lot. Add water, sewer, stormwater, streets, footpaths, local park. Not even $100K per lot. In Rangiora (40m drive to the centre of Christchurch at 3am Monday morning; don't ask about peak hours) that lot will cost about $180K). Contrary to Tookey's assertion CHC is reverting to normal pricing so this is not particularly outrageous.
The cost of council planning and perpetual shortages (even minor ones) of land for residential building is about 100% markup for land in Canterbury. And that cost in Auckland? Not enough digits on the calculator.
The other fallacy relates to "affordability". A mortgage of $500K at 4% is less affordable that one of $250K at 8%. The simple reason is that the former is riskier in the sense that the interest rate is more likely to rise than fall whereas the reverse is true for the latter example. If you add some form of hedging against rate rises and the prospect of losing your house because you can no longer afford to service the mortgage then these are no longer equivalents.
As I said in my previous response to the first article, this piece was an edited extract (about 1200 words) of a much longer discussion piece of around 6000 words. The editor cherry picked elements to generate further reaction – which it most certainly did. So a few additional words of context and explanation may be pertinent. I am not sure that you have been reading what was said in the article. I am not introducing 'dangerous fallacies' in any way here. I am introducing some facts about the process of construction with regard to the nature of the type of housing selected and drivers for individual procures of construction. At no point did I mention anything about interest rates except in the broadest sense of the downward pressure in recent years.
When I talk about the behaviour of the building industry it is built on substantial experience and speaking extensively and at all levels to participants in that industry - both constructors and developers. If you actually take the time to speak to builders, you will find they are more concerned with planning for the next bust period of the boom-bust cycle rather than playing altruist and building affordable homes at a lower unit profitability. Builders do that by not taking on board any more work than they can cope with. Why build themselves out of a job more quickly and more rapidly bring about the bust they fear? Most I speak to think in terms of between 3-5 years until the good times stop for these guys. I would invite anyone reading this to go and speak to a builder for the truth of this. Even at the top of a boom market you see construction companies going bust. Why? Their risk profile is appalling and their profitability is marginal even at the top end. Nor is their capacity scalable. Whilst land supply is a factor it is not THE ONLY factor at the root of the problem. i.e. the assumption that more land, released and consented more cheaply and rapidly, equals more housing more quickly is fundamentally flawed. This is only true if the capacity of the industry can scale up rapidly to demand. In reality we do not have a large amount of surplus capacity to offer in either Auckland or NZ. Arguably the problem is multiplied by the twin crises of Auckland housing and the CHCH rebuild. Our industry is fundamentally skills constrained - ask any builder. We cannot readily absorb additional demand increases with transient skilled labour. 2000 Polish plumbers are not likely to be on the Kiwi equivalent of Eurostar and rock up in central Auckland at the drop of a hat. Also our industry is largely (around 98%) made up from small, one man band, ephemeral companies that subsist from invoice to invoice. Builder’s merchants are referred to as the builder’s banker – the 30 day credit terms of whom keep the small builders going. The risk profile of these small companies is such that they spread their effort over several projects at any one time to keep the money turning. These small players that make up the bulk of the industry have no realistic ability to scale up production without taking on more staff and loading up their risk – hence the cost to build things climbs in high demand times. In addition they are inefficiently organised, having minimal bargaining power compared to the larger group builders.
Land is just a type of ‘material’ of the process – just one factor of production. Is it important? Yes. However, availability of material does not in itself imply higher rates of production. Thought experiment: Imagine Toyota got an additional million tonnes of sheet steel dumped outside one of their factories at zero cost. Will that inevitably lead to more cars in circulation? Maybe but not likely. Toyota may up their production to a point, however their brand is more quality focussed. Consequently they are likely to increase it to the optimum rate of the of the factory. But they are also not likely to want to undersell their brand. Are they likely to build a new factory because some cheap materials are available in the short term? Probably not – unless this newly available factor of production can be guaranteed. This is analogous to the current situation with regard to land in Auckland. The industry has finite capacity, is fearful of a bust period and is planning for the future – hence the apparent volume constipation.
The structure and technology of the industry. High density affordable houses are more expensive to build (per square metre) than larger properties. This is at the heart of this particular piece. Ask any house builder - they will tell you. Typically ‘affordable’ homes are two or more storey and attached rather than detached. The scaffolding required (thank you H&S act 2016) plus other constraints on construction lead to a cost of around $3k/m2. By contrast larger single storey houses are $1800k/m2. The result? Affordable homes are affordable to the end purchaser, not the builder – who in turn are not likely to altruistically build lower margin housing for the benefit of the purchaser. Furthermore for the same reasons new commissioners of construction tend to specify the largest possible house on the sections that they purchase in order to lock in the maximum residual value. You may wish to consider the following articles and wonder why SHAs are not building their affordable quotient. Try looking at these sources.
http://www.stuff.co.nz/auckland/local-news/manukau-courier/79872411/otar...
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1169...
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1154...
Affordable houses that the market is crying out for are 2-3 bedrooms. As a result of this series of constraints and issues we build too few houses of an inappropriate size (4-5 bedrooms) to address housing affordability concerns. Compare the dwelling bedroom numbers proportions in the census from 2013 and the trends demonstrated. Note the increase in 4-5 bedroom dwellings.
http://www.aucklandcouncil.govt.nz/EN/planspoliciesprojects/reports/Docu...
http://www.google.co.nz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja...
A further aspect of industry structure is related to the numbers of land development companies in operation. Practically it is a hard industry to get into since there is a need to invest in substantial amounts of expensive equipment - fixed capital investment that makes the business much harder to turn a coin compared to a jobbing plumber or similar. The reason that you do not get every man and his dog setting up is that the kit required and the risk they take on (anyone who deals with geotechnical engineering risks will understand this) implies substantial companies with significant capital investment. Doubling the amount of available land will not in and of itself double the number of land developers or the capacity to deliver developed sections. Again these same players were burned in the last boom-bust cycle and play the game conservatively. They do not take on board more risk than they have to. Maybe they lease a new grader. Maybe a couple of backhoes. However they will not dramatically increase their capacity since they will stoke their overheads accordingly.
Anyway – I could go on but will not. The bottom line is this. More land does not equal more housing in any meaningful way to address the housing crisis. It is a contributor, not the only game in town. The industry is not scalable to cope with demand expansion – infinite capacity it most certainly does not have. Investment in the industry is low since the long term scale of the industry is such that investment in capacity continues to be seen as a waste of money with a looming ‘bust’ just around the corner. The industry is inefficient since it is primarily constituted by micro enterprises with little buying power. The market is what it is. If there is any genuine interest in sorting the problem in a reasonable timeframe then it will require government intervention to incentive or compel outcomes not inputs – period. In the final analysis we are in a mess. We need new thinking. Einstein said “We will not solve the problem by using the same reasoning that created the problem in the first place”. By contrast current thinking in society regarding land availability is the equivalent of Abraham Mazlow's (the hierarchy of need guy) observation who said "if the only tool you possess is a hammer, then every problem becomes a nail. Land release is not solving the problem in any meaningful timeframe since outcomes are not compelled through 'use it or lose it clauses etc. We need to think bigger.
John, let me start by saying I agree with everything you have to say about the construction industry. What I know about construction is limited to being forced at the point of a gun to make a shoe-shine box aged 11.
Most importantly I agree that more land does not automatically equal more construction.
However I stand by the assertion that housing affordability depends almost entirely on land costs. We will not have an affordable housing market until the ratio of built cost to land/infrastructure cost is roughly 2:1.
I think what is lost in many of these current arguments is the volatility of demand for housing. Our population history is characterised by swings in natural increase and immigration increase that are very hard to predict. It's fine for the economists to wax lyrical about the high level view but what is generally lost is the firm level impacts of those demand swings. We all know that the self-employed builder who takes on a couple of hammer hands and an apprentice goes to the wall in a big downturn like we had in 2008-11. What we forget is that s/he doesn't come back when work picks up again. In general, in a small market like NZ, house-building capacity is fragile.
On the land-supply side that same volatility has led the nation to be a bit complacent about having a planning regime that is equally fragile. It kind-of works when demand is low but falls to pieces when demand is high.
So we have fragility built on fragility. But I am still inclined to the view that you have to have robustness in how buildable land is supplied before any robustness in the construction industry will have any effect.
Donald
In the happy afterglow of an AB's victory I will endeavour to respond in as sober a way as possible. The other side of this of course is the appearance that answering this late on a Saturday night implies that I need to get out more. I will take that one on the chin.
Anyway, notwithstanding the previous caveats, land is without doubt of huge (but not the only) importance to the affordability question. The proportion of house prices / valuations that land makes up has been escalating over recent years there is no doubt. I did some work a couple of years back (apologies but I do not have the reference immediately to hand - could be found if absolutely required) that showed that while construction costs in terms of materials and labour were climbing broadly in line with inflation, land prices were escalating at approximately double inflation (at the time around 7-8% pa). All the evidence seems to reinforce the situation to date. Obviously this is the costs of new construction rather than the valuations of existing property.... which have been escalating completely out of proportion with inflation. To a certain extent this could be seen as a good thing - certainly by property owning people. I am not convinced most citizens would be overly happy if production was continued at a rate that saw a depression in property valuations as a result.
As a result there is no doubt that the forcing down of land prices through production and development will lead to more affordable housing. Eventually. However there is a caveat. There is a need to create surplus supply in order to affect affordability changes in any way shape or form. Unfortunately this is not happening. In the previous piece I made some points about compelling outcomes rather than expecting commercial companies to work for the public good by developing additional opportunities to supply. The reason being that by observing behaviours in the market it is apparent that developers and constructors are operating at a rate of delivery that ensures sustained values of property and construction in general. Check out the SHA at Long Bay for example. Total numbers of dwellings proposed? Something over 2000. Total numbers of sections released for development annually? Around 200. Work will continue for a decade…. Total effect on housing affordability and property prices? Approximately zero.
What is the reason for this lag effect - beyond of course the cynical maintenance of margin for developers at the expense of the ‘ordinary kiwi’? Actually quite simple. Most production processes are rapid. Cars are manufactured in the space of a few hours. Computers in minutes. Many other consumer products literally in seconds. Manufacturers can therefore amend rates to meet immediate needs very rapidly, responding rapidly to demand. By contrast housing takes months to construct after consenting. The ‘flash to bang’ time is maybe 9 or 10 months for a house. With that in mind speculative housing constructors are looking almost a year ahead and will only commit to build through up front commitment of resources. In this model there is an immediate brake on the build decision across the board and thus a very slow response to demand. How much risk does any one developer want to take on? This in turn precludes reacting to the provision of new land parcels in any meaningful way that will rapidly affect pricing. If you can imagine it is the equivalent of the loading goods on a narrow boat sailing very slowly up a canal to the market town of choice. The farther away the town the more stock has to get loaded on to barges for the very slow trip up the canal. The longer the metaphorical canal (i.e. delivery time) the more stock has to be put in to the supplychain in order to cope with demand growth and/or variation. Lots of boats, lots of employed people, lots of overhead……. Very slow rate of customer order fulfilment.
Since the canal (delivery time) is very long in this case, lots of stock has to be in the process of delivery at any one time. The stock (aka WIP – Work in progress) represents a huge construction investment, potential loss/profit and substantial capital at risk. In the context of thin margins, existing risk profile and ‘fragility of demand’ (nice phrase – I like it!) it is therefore no surprise reaction times are low and companies operate in a manner that sustains land/property prices with a lower exposure to the downside of demand variation.
What can I say? The only way to change the current situation is to push, compel or incentivise outcomes rather than inputs.
Check out the SHA at Long Bay for example. Total numbers of dwellings proposed? Something over 2000. Total numbers of sections released for development annually? Around 200. Work will continue for a decade…. Total effect on housing affordability and property prices? Approximately zero.
Great case study example. But why does the landowner drip feed the section release? My interpretation of your reason is that the landowner can't construct the dwellings fast enough.
But first we have to ask ourselves, why does the landowner follow this 'sub-divide to design and build' model (effectively the structure plan model)? Why do landowners want to design the neighbourhood at all?
Why not just sub-divide the land, put in the streets and the sidewalks and the stormwater infrastructure etc. - and sell the bare sections individually? Let prospective new homeowners make the arrangements for improvements to the land (i.e., their own homes)?
This is how our new neighbourhoods in the past developed - and that's why folks want to live in these previously established neighbourhoods ... they are more aesthetically pleasing because of the diversity. Young folks can go in and buy the worst house on the best street and improve it. Eventually as the land price rises over time the old house gets bowled - and a new one is built without the constraints of covenants on what you can/can't do by way of a building style/design.
I think we need to consider the (I call it) "unorganic" nature of new development. It's wasteful. It doesn't allow for re-use (of materials) in construction. It doesn't allow for individual choice (and hence isn't meeting many individual preferences). And it inflates cost as a result.
But then that's only my anecdotal perspective - so would really appreciate a more studied view of it from a construction industry perspective.
Anecdotally, I suspect the "slow release" of newly subdivided land in greenfields sites has more to do with retaining land values (for the balance of land not released immediately) by way of land banking and ensuring that the early dwellings constructed are of a design and character that keeps the price of land in the rest of the neighbourhood high (inflated).
Land developers want to maximise profits and planning/land use laws are structured to facilitate that.
LOL but don't agree with the stereotype. NZ isn't Stepford, Connecticut or Coronation Street - but those are the new neighbourhoods we're building. We need more Ponsonby's of the future. I don't think these structure planned communities will ever become that sort of organic/quirky which turns fashionable over time.
Did you not see the epic meltdown from the control freak weirdos of Travis Country (apparently a swamp-adjacent covenant-infested suburb in Christchurch, even though it sounds like something from a Kenny Rogers song) when somebody attempted to install a couple of perfectly normal and attractive new houses without the required plastic columns on the front? Blew their collective gaskets, laagered the SUVs and created a blockade.
The whole thing was beyond hilarious, in a sad and exclusionary kind of way.
I did, if I recall they were new transportable homes to be cross-leased (I think) on the single section. And yes, some resident(s) grabbed their titles and created merry hell about covenants. The thing that occurred to me was that the existing residents who complained did so because they've been brainwashed to think where new neighbourhoods (i.e., new subdivisions) are concerned 'sameness' matters regarding future capital gains. They've bought the developer's mantra lock stock and barrel,
New design/build subdivision developers needed a counter to the years of evidence associated with 'worst house best street' capital gains - that counter was covenants (and the covenant mentality), I think. And yeah, Travis County proves it's effectiveness :-). In respect of Luke's theory on power - it's power over meaning- The ability to define reality for others so that they either internalise the existing order as ‘divinely ordained and beneficial’ or simply acquiesce to it because they can ‘imagine no alternative’ .
Many new home buyers can 'imagine no alternative' because the 'organic' neighbourhoods are too pricey - and so when they get into the 'sameness' subdivision - they internalise the existing order.
Yeah, the house or houses going in were new builds, but had been assembled off-site and just had to be trucked in. If I'd been a neighbour would have been delighted at avoiding months of on-site construction noise and disruption.
Power over meaning. Interesting. Very much agree. And going from soft social pressure for conformity to legislating conformity. Always comes down to tribalism with humans, doesn't it? It could be boiled down to a meme, with appropriate photo:
"Have to own a house so we can paint the walls!
Paints them white."
As for worst house in best street, what happens when whole subdivision becomes hopelessly dated all at once, like the housing equivalent of avocado green and harvest gold appliances? In a more organic suburb there's diversity and variety, it doesn't stick out like a big dog's balls when maintenance goes at different rates, individual buildings can be removed and replaced without affecting the perception of the whole.
Thanks Kakapo and PocketAces - I oft wonder whether I'm on the wrong track.
Which brings me back to the authors solution - one touted by lots of commentators at the moment - which is government needs to do the design and build .. which to me isn't the answer. Government to me needs to compel owners of large parcels of unimproved land in residential zoned areas to build it, or get taxed (big time) not to build. And with respect to this SHA concept - if you want/accept the 'special' designation, you should also have to contract to sell to the Government who granted the status, the land at a (then) market price (i.e., unimproved price at the time of accepting the special status, and/or at the time of granting a land-use change to residential). And then central government should put in ALL the streets, sidewalks, etc. IN ONE GO and get ALL the sections on the market at the same time at cost.
Central government should not build houses. It should develop unimproved land and on sell it at cost.
One of the overarching trends is the erosion of independence, and the means to be even somewhat self-sufficient, with the common working stiff's avenues for autonomy being gradually eroded away.
William Cobbett was saying pretty much the same thing in the 1830s, writing about the erosion of wealth of the English working people as a result of the enclosures, and similar annexation of common rights.
Don't know of him but sounds very Marxian in thinking. Marx determined that for capitalism to function and flourish, the vast majority could not be self-sufifcient but rather must be compelled to sell their labour - and that the labour-value of production was that which drove competition (i.e., lower labour-value = greater competitiveness). And that trait would drive a division of labour in a capitalist economy (i.e., specialisation to further fuel that lack of self-sufficiency).
Or at least that's my interpretation of what he was saying :-).
He's a decade or two pre-Marx, and possibly an influence. Spent a bit of time in America, too. I randomly stumbled across him in a university library (one of the books happened to be shelved opposite my desk, and I was procrastinating). He's a bit of a dogmatic fruitloop in some ways, but very interesting, and gets it right in others.
http://onlinebooks.library.upenn.edu/webbin/gutbook/author?name=Cobbett…
I liked his anti-potato fuel-inefficiency rant, which I think is somewhere in Cottage Economy. Cottage Economy was a kind of subversive 'screw you' to the tax-collectors, landlords, and suchlike authorities, and has instructions on how to do things like brew beer, to do an end-run around the regulations.
I think for a growing number of people that govt directly building is the only solution, but I also think there is an in between that and all the bleeding McMansions we see. Practicality does elbow me in the rib though to remind me we are dealing with such miniscule sections now that some things might not be overly practical, although when I see all those white coffee coloured semi-detached I can't help thinking of San Francisco when I was there some years ago and the rainbow hues of them, having been painted in all sorts of colours you wouldn't dream of here now.
Why? Because I'm not a particular fan of all the McMansions around, and the sameness, and the crappy paint jobs and fittings, and the inability of people to be able to roll their sleeves up and get stuck in, as we used to be able to prior to leaky homes, that we did not create
While I don't disagree with your statements on construction, Donald is right, the price of the land comes first.
When all land has the 'potential', then the first thing it will break is the monopoly of who gets to develop and it would allow far more freedom for developments to occur for those that want to build with less or no covenants, as Kate and some others do. They could have a whole subdivision of relocatables. If there is a market for it, then someone will supply it. There are over 190,000 lifestyle blocks that some owners would be more than happy to develop to meet any demand.
Also when the land is magnitudes cheaper, then not only is the section magnitudes cheaper, but if the market demand is for smaller attached developments, then the extra cost of constructing these is not so much of an issue.
And you have to ask yourself this, why is that 'The ‘flash to bang’ time is maybe 9 or 10 months for a house,' when it wasn't that many years ago it was 4 to 5 months. It is a rhetorical question but the reasons are systematic to why we have the issues you state.
These systems are mostly inherited from the UK (which now has the smallest new house size in the EU), which they continue to promote, so they should be the last place we should be looking for solutions, unless you think you can subsidize affordable housing into existence.
Very nice and thorough article John, appreciate your insight ... Few questions come to mind:
- While the risks of a bust period is on the mind of builders ( and that is true) , but isn't that a bit overstated in this cycle ? I guess they all know that they have a boom to last for 10+ years of building ahead of them , so some builders will have jobs in the pipeline until they retire.?
- All your points about costs are very valid, only folks who have developed or built lately would know how hairy and costly it is ... So , in your professional opinion What do you think the solution to accelerate building would be? or bringing the cost down
- Some political parties and commentators aledge that we have an army of unemployed young people who can be trained and qualified to help in accelerating the building process and maybe reduce costs .... What is your take on such thoughts
I appreciate your thought on the above ..
Valid observation Zed, they are fully related .. there is a direct relationship between existing house prices and new built ones in the same area or town and in similar size ... At any given time, a buyer will decide between buying old or buying new (or building) ... and many will certainly tip to which ever is significantly cheaper or within budget .
The rate of construction and its cost are crucial factors in the outcome ,,,
John is pointing out to the building industry constraints and ( in my view) why it could not possibly catch up with what the Gov is planning or the opposition is promising ... there are other spanners in the wheel which affect the rate of supply of new houses and their type and size
That affects the prices and availability big time!!
i.e. talk is cheap, building houses is Not.
Taking each of your questions in turn:-
- While the risks of a bust period is on the mind of builders ( and that is true) , but isn't that a bit overstated in this cycle ?
>>Not so much. Most builders are long enough in the tooth to have experienced at least one bust if not too. The last one post GFC took out some key players that were otherwise robust. Most CEOs and MDs of SMEs and the larger firms are in their 50s+. As age increases perception of risk grows. While the public perception is one that all builders are cowboys out to make a quick buck, the reality from my experience is very much different. The ones that are still around now have generally gotten smart at not getting caught out. I guess it is the equivalent of asking someone 'do you want to bet your life on it?' for these types of player in the industry. The attitude is broadly that of 'plan for the worst, hope for the best'.
I guess they all know that they have a boom to last for 10+ years of building ahead of them , so some builders will have jobs in the pipeline until they retire.?
>>Maybe. But try to remember that the '10 years worth of building' you refer to could literally evaporate overnight in the context of a global downturn. Just because funders of construction CURRENTLY agree to underwrite the project does not ensure that at the point of initiation the money will be available. If the situation changes funding gets pulled. This is very similar to the option commitments to purchasing of airliners from Boeing / Airbus. Downturn = order cancellation with the fee forfeit accepted as a preferred outcome. The other truism is that most companies that go broke do so with full order books. Builders are notoriously fragile to cashflow crises (anyone remember Mainzeal???)
What do you think the solution to accelerate building would be?
Various options, broadly relying on Government taking some of the risk on the chin to ensure outcomes - as it stands the market will act as the market without a finger on the scales. Options?
1. Contracting juicy development contracts to a large developer with time bound delivery criteria. Creating more ready to go sections ahead of the development mareket.
2. Build council houses - not popular but it has worked in the past in times of crises.
3. Introduce co-owned housing using the 'Housing Association' model from the UK. Government retains partial ownership and allows assisted occupants to buy out at some point in the future.
4. Tax measure - CGT extension is favourite. Maybe a stamp duty. Land bank tax makes a degree of sense. Problem is that all can be dodged relatively easily.
5. Incentivise buy to let sales. What if the profits from rental property sale was able to be used to invest tax free into kiwi saver schemes? Double effect of releasing additional properties into the owner occupancy market and capitalising NZX with surplus capital. Just a thought.
- Some political parties and commentators aledge that we have an army of unemployed young people who can be trained and qualified to help in accelerating the building process and maybe reduce costs .... What is your take on such thoughts
>>Great. Once you trained these skilled tradies and they build us out of the crisis, then what? Once the problem is solved what jobs will they have to go to in an industry downturn? Smacks of a 'use them then lose them' mindset of short-termism which is good in the short term for the economy, but not so great in the long term. The skills of construction are not broadly transferable to the rest of the economy unfortunately. The newly minted tradies will therefore build themselves out of a future. One possible out is to concetrate the new tradies in the factory built / prefab market. Problem is that the monies necessary to introduce prefab in a meaningful way is not something the low margin construction industry can easily deal with.
I know, I know. More and more problems - not so many solutions.
"If they build at a rate that forced down unit costs of houses, they would in effect build themselves out of a job".
This prerogative exist in all our economic endeavors. It is perhaps the biggest fallacy of capitalism; the pursuit of profit by producing better units, or pushing cost down, ultimately leads to that endeavor's own demise. In other words, replacement unit are the bread and butter of all our economic endeavors. This prerogative has turned the medical profession away from eliminating disease, thereby running out of customers, to favor instead mitigation of symptoms. This is the reason why our lifestyle is constantly eroded, cost-cutting production and diminishing quality control.
Hi Kate / Eco Bird / Zed
Yep - building is a different game than investing. Fully agree. In New Zealand, the sale of land and procurement of construction are usually dis-aggregated except where speculative builders are operating. Purchasers of new builds approach a builder at a random inter-arrival time. As a builder you never know when or if anyone will come - only that market conditions are sometimes better..... sometimes worse. Each individual house even on a SHA thus becomes an individual project that has been commissioned in isolation from the other projects around it. Look at Hobsonville, Longbay, Riverhead etc. Multiple different builders, working alongside one another, not using economies of scale for purchase, deliveries only co-ordinated in the most ad hoc manner, waste removal is individually organised, labour wanders from site to site according to the ebb and flow of demand and rates for work. The result in a very thin market for skills is duplication, inefficiency and a logistical nightmare - and of course additional costs for all builders.
By contrast when there is a relatively coordinated set up - take a look at the continuing work in the Stonefields development for example, economies of scale can be achieved and efficiencies gained as one site manager can manage the coordination and delivery of multiple homes in relatively quick time. However this latter development is relatively speaking a one off in the country. Go to the UK for example this is pretty much the only method of delivery with major speculative builders (Taylor / Barratts / Wimpey and so forth) constructing to a standard design 'cookie cutter' developments.
Now I am not advocating for the speculative builder strategy particularly. However it does offer advantages as stated. But it requires some semblance of a master plan as alluded to by Kate. During the 1990s following the last 'bust period' most former speculative builders transitioned to a model in which they did not actually do their own land development. Many of these operations went to the wall at the time. As a result the cohort of volume development operations became quite small. As a nation we are much more risk averse both as individuals and companies. This is mainly to do with the evisceration of the Speculative Build market during the downturn of the early 1990s. Even our current group builders (GJG, Jennian, Mike Greer, Signature, etc) whose names we all know, are super risk averse. Most of these are franchise operations with various regionally based builders (in Auckland there will likely be 4 broadly aligned to the former councils area) who have the right to operate with the headline brand in a particular area. Interesting fact - at present in NZ there is actually only a handful of builders constructing more than 100 houses annually. Literally a couple of dozen in total, along with a screed of one man operations building maybe a couple per annum. But even this risk averse strategy has its issues as evidenced with the problems of franchisees experienced by Stonewood homes recently.
So what is the result? 'Organic' developments tend to be the norm, that tend to develop inefficiently and haphazardly. While the planners mandate a given number falling in to the affordable bracket, builders tend to react to the demands of customers who specify the types of homes that they can make the most money in the construction of - i.e. large / single storey for preference. The agenda for these guys is driven by margins, turnover, risk and speed. This last point is significant - it takes about as long to build something affordable as it does to build something bigger with greater margin.... that allows you to move on to another large house that makes more margin.
As far as the land developers per se are concerned the calculus is simple. I can develop at a given rate optimised for my own operations - maximising the return on my hardware assets employed and fully utilising my employee time. I can guarantee my selling prices increasing annually and the land I am working in is increasing value at a rate close to or exceeding the amount of value I am adding to the land by my work. If I accelerate I will likely have to redeploy to another location which has addition costs and risks associated with it. If people are randomly rocking up for land and I can see the market starting to slow (apparently happening....) I would accelerate why?
I do not advocate design and build being undertaken by government. Hell no. But there are creative ways that can leverage outcomes more rapidly. Co-ownership of equity in housing for first time buyers (the Housing Association model from the UK) is a super low risk proposition rather than council houses for example. Developing a PPP (aka a BOOT scheme - Build, Own, Operate and Transfer) scheme for land development, construction and management of housing that ultimately can be transfered to public ownership at market rates makes sense also. A range of things can be done.
Nick Smith wringing his hands and saying things are out of control, behaviour such as this - http://www.stuff.co.nz/business/84126729/complaint-after-west-auckland-… - is BS. We either work hard to fix the problem NOW or suffer the economic meltdown that investor behaviour is driving us towards.
I'm confused! Take this observation:
While the planners mandate a given number falling in to the affordable bracket, builders tend to react to the demands of customers who specify the types of homes that they can make the most money in the construction of - i.e. large / single storey for preference. The agenda for these guys is driven by margins, turnover, risk and speed. This last point is significant - it takes about as long to build something affordable as it does to build something bigger with greater margin.... that allows you to move on to another large house that makes more margin.
You're suggesting the purchaser of the home wants to maximise their potential capital gain and at the same time the builder wants to build exactly what the consumer wants - and handily - that same design-type also maximises the builders profit.
I just don't see it in respect of folks who want an affordable home (i.e., FHBs). Most want to minimise their mortgage outgoing - and be able to afford both having a family AND owning a home of their own - something they can on-sell to the next FHB when they need something bigger, or can afford something flasher. Alot want to buy old (because of price sensitivity) and improve (because renovation is a hobby for many in NZ).
So which of those greenfields subdivisions you mention, can I put down my Keith Hay transportable home or place the bungalow I bought from a house traders yard?
That's the kind of greenfields neighbourhood I'm thinking the government need to get to market.
If you want an affordable home you have to buy land (whatever size you see fit and is according to your own definition affordable. Then you can but your home (Keith Hay or otherwise transportable) on it. No worries - just so long as the covenants on then land allow for that type of home. In the SHAs it is all new build stuff I understand rather than something relocated. The margins I was talking about is that of a either a spec builder (there are some guys who buy a chunk of land and then scrape together the necessary capital to build something one off and sell on. In that case they will seek something big to put on the land to maximise return. 'Affordable' homes (jeez - since when did we start considering 500k cheap.....?) tend to be on smaller plots on the site (obviously). Again there is no compulsion to develop these specific sections in preference to the larger, higher margin stuff. If builders can choose who to work for do you not think they will prioritise the top end of the market rather than the lower? If you ran a wedding venue and you had the choice of allowing a high end Remuera bunch booking it out or a collection of dodgy looking bogans in two tone Holdens, who you going to pick? Builders can similarly pick and choose clients in a market that is in hot demand. As a result they can price sharply to attract the work.... or with a fat margin to reflect the risk or the hassle. That is the free market in a nutshell.
Builders look at who is asking (yes - prejudice and preconception is a fact of life in reality), the value of the proposed job, the likelihood of default and the hassle factor of dealing with clients who are likely to be on a constant exercise in arguing over every cent. Do the clients have a contingency fund? Is the business worth having? Does this look like the 'too hard basket'? Is the job worth having?
Hence the lack of development of cheaper (for the purchaser - not the builder) homes with low builder margin tends to be down the priority list. Work is not necessarily first come first served. Builders can choose and are not required to work with less wealthy clients are they? - unless they choose to do so. These builder folks are cagey, risk averse and choose an easy coin rather than a hard coin for preference. Again you can't force production, nor can you force a private company to do business with a poor potential risk (whether or not it is objectively true - risk is a perceived thing). Think of a religious fundamentalist baker. Are they compelled to bake a cake for a gay couple? You get the idea. Homeowners want certain things to happen. Government would love certain things to happen and wish like anything for them to occur. However Builders have a choice to build or not to build in the current market. Both parties - builder and client have to set terms and conditions acceptable to both. It is not perfect competition. Transient labour, materials and companies have huge establishment costs in NZ and therefore the market does not operate nicely or conveniently for the consumer.
Does that answer the question?
I agree John, all your points are valid and come straight from real life ... having finished a big renovation job myself lately and being dealing with builders and all sorts of trades , I discovered that it was very different this time than 10 years ago...
I guess some people are being overdriven by emotions and would rightfully like things to happen as they should in the ideal world or stable conditions - they forget that Market forces are Real and at work . Just like they look for their "rights" and benefits, builders and everyone involved in this industry have the right to look after their best interests too .. and there is no law or logic to force them do otherwise .... after all No one that has his hands burned in previous busts wants to do that again !!
Alas some political parties are trying to use and inflamate people's sentiments without realising, or purposely oversighting, some complicated bottlenecks be it in Land, Labour, Builder, consents, or others ... puting out unrealistic ( or ill studied) plans which cannot hold water in future is another big problem ...
Let's hope that A government ( which ever) can come up with a balanced plan to stir the boat safely into bay.
Thank you again John.
Suppress the "feels" long enough and you got a recipe for disaster, people not being able to afford to house themselves IS an emotional issue, whether the facts acknowledge that or not. They BOTH exist, best they try to co-exist. Very male thing to do, to try and make facts and data the only thing that anything is based on.
My point is about politicians thinking they are doing the right thing because it feels good to themselves and their base to have a multimillion dollar home. Who cares about affordability just so long as stuff still ticks along. Right?
The reality is that the trends and mounting economic risks have been there to see for years. This is not a new thing. Obviously the emotional trauma of not having a home is significant and worthy of concern for all. My intent was to highlight the intransigence of policy makers.
Yes and thanks! We've got some owner-operator builder friends, but they don't sound all that much like that. The discussions normally turn to the very wealthy, architecturally designed builds being the most difficult and untrustworthy of the clients to work for. But again, very much a generalisation, I'm sure.
This comment is the one that doesn't quite answer my question:
Then you can but your home (Keith Hay or otherwise transportable) on it. No worries - just so long as the covenants on then land allow for that type of home. In the SHAs it is all new build stuff I understand rather than something relocated.
So which of the newly developed subdivisions in Auckland allow for the transportable new, i.e. the Keith Hay, 100m2 home without a garage (if they have one, that is - because these transportable folks are designing to meet the requirement of the covenants too!)?
Am I going to run into covenant problems for my modest transportable home on all these SHAs?
And moreover, why wasn't a condition of being granted the SHA status inclusive of the requirement for NO covenants anyway - which would allow for relocated (second hand) bungalows? If the government really wants affordable, that is. Which I don't think they do.
They want the PPP model where the type of dwelling will always be designed to retain the builder/developer margin AND keep the land price high for the landholder into the future.
I see little reason for developers to put covenants on their sections - aside from wanting to keep the land price high on the slow-release section (i.e., staged) development model. Not saying there's no call for developments full of $850,000+ 3 bed, 2 bath, integrated DCG homes - but that's not what I started my family out in - and not what most NZers in the 50+ age group started theirs out in either.
I suspect (but no one in the industry will confirm or deny - rather most skirt around the subject) that these new build covenants have made that high-end home the near monopoly choice available for detached homes on the fringes. And this has also had the effect of making the Beasley home of yesterday on a cross-lease section with a carport in Auckland ridiculously expensive as well.
The covenants I have seen (and most of the development websites don't make them public on the site) are unbelievable - something out of 1984, in the sense of repressing individuality. But maybe I don't get out enough. I'll go and try and look up all those developments you mentioned earlier - and see if I can find out whether my 100m2 Keith Hay home will be permitted.
I just wish government would have an honest conversation about affordability.
At the risk of super cynicism allegations, politicians play to their base. Who is the affordable house most likely to be appealing to? Follow up question - who are most likely to vote for? Can the key players (no pun intended) be honest in this context? Maybe not.
Yes :-) but the middle class parents and grandparents in the 50+ sect - with middle class kids - are getting angry about this. If Winston comes up with something well considered and realistic (but not targeted at "build more state houses") in this regard - he can capture both those generations.
Not saying we don't need more state houses - we do - but we also have to have a plan that prevents those who qualify for state housing from getting right out of proportion. Every time Paula Bennett starts shouting out her "we're building" numbers - I keep asking myself, but what are you doing to keep the waiting lists from growing faster and faster - such that you don't fall off the treadmill altogether. You can only reclassify what constitutes homelessness so many times :-).
I fear that living in a tent city will become considered not homeless here in the future - and she'll be managing that wait list as well.
Quote a lot as a matter of fact, it's a long and difficult job but it is working. Not that you would know that if you relied on the mainstream media for your understanding of what the Government is actually doing
https://www.msd.govt.nz/about-msd-and-our-work/newsroom/media-releases/…
But maybe I don't get out enough. I'll go and try and look up all those developments you mentioned earlier - and see if I can find out whether my 100m2 Keith Hay home will be permitted.
LOL - I went shopping.
Can't put my transportable home onto either Hobsonville or Long Bay sections; as they are house + land packages only.
Riverhead (although sold out) I could have purchased a section with a covenant. And yup, the covenant is pretty much the stock standard of what I've experienced before - all the qualities and characteristics that are the complete opposite of an affordable build. Some that made me smile - square or rectangular footprints banned; zincalume banned and want a nice smooth concrete patio for the kids to run their plastic three-wheeler around on? Forget it - creteprint only. And those were just the ones that caught my eye.
Oh and my place always has a few weeds in the garden higher than their acceptable maximum.
Which is exactly both of our points, John.
One-off opportunities for affordability isn't what's needed. Large scale opportunities for affordability is what's needed. Less (not more) controls on greenfields development.
So, here's a thought exercise.
We take a leaf out of our colonial history - I think this is (sort of) how it went:
Legislate a use-it-or-lose-it policy, with a buy-back by the Crown as first-right-of-refusal for large unimproved landholdings in the AUP residential zoned areas. Landholders either provide the inside-the-boundary infrastructure for all land parcels within a legislated timeframe, or the Crown purchases all remaining unimproved land at (say) a cost +10 formula (based on what the landholder paid at the time of their purchase)
The Crown goes in with its bulldozers and on-sells the section parcels at its cost to owner-occupiers only (with a title caveat preventing the on-sale of unimproved land and a requirement to build within say 3 years) - no controls, no covenants on the land.
Let the people build or transport what they like onto the sections as long as it meets the building code.
Sure it sounds ridiculous, but so is the $1m average house price. Do you think it has any chance of solving the crisis? :-).
The point is, you need lots of one-off opportunities, by large developers to 'small' owners being able to subdivide, allow building up and out etc.
Allow people more freedom to live on their own land the way they chose. For those that do not want relocatable as their neighbour, then if the market is there then developers will develop for that, as they will develop for relocatables if they demand is there.
Bringing in more regulations will only make housing less affordable, as have been the case.
John Tookey
Your comment is basic, straight forward and says it all
Having considered it in all its dimensions, there is only one solution and that is to dial "demand" all the way back to meet the actual capacity of all the processes involved in the "home building" industry, or slightly less than capacity and so get a little price tension going
I agree wth a lt of this about building behaviour. Call me cynical but observing Canterbury builders at conferences, I have suspected building firms, as perfectly rational businesspeople, are interested in their bottom line which isn't actually the same as meeting the 'market' 's main needs. They want a risk minimising, way of maximising return per house built. They can do this by not ramping things up, and instead building bigger homes for a profitable niche -wealthy homeowners and investors. A rapid build of cheaper housing also puts f pressure on workforce costs ( potentially huge as houses have few economies of scale, and are highly labour intensive), and risks supply bottlenecks. Better to go nice and steady, harvest low hanging fruit and you can always blame planners and bureaucracy for delays.
Main issue with this is the tyranny of distance and lack of depth in the economy. Building materials are usually high volume, low value. As such transportation is a critical factor in construction. Research demonstrates that 30% or more of the cost of a building is in the form of transportation. NZ is uniquely hit by this. We have a tiny population that is geographically spread over a country slightly larger than the UK.
Needless to say this is not very efficient from a materials perspective. Trucking plasterboard and timber around the country from its source or process facilities, or for that matter greywacke stone from quarries is expensive for the procurers of same. To give you a further idea, Sydney in Australia has a population of around 4.5m - pretty much the same size as NZ. The total area of Sydney is 13000km2 - compared to 268,021 km2 (thanks Wikipedia!). The total numbers of builder's merchants in Sydney is a little over 400; by contrast NZ has 830 or so to support the same population. Straight away this stacks up the amount of inventory and overhead in the system - all of which has to be borne by the consumer.
Sorry forgot to add that the other bit of distance tyranny is the obvious costs associated with importation of high volume materials internationally. In addition the types of materials and technologies from overseas will not pay for the changing / upgrading necessary to meet NZ code. Any materials that come in from overseas need to be BRANZ certified for most practical purposes. Who pays for the certification? The vendor. Many vendors do not wish to do so since the volumes that we are likely to shift in NZ is tiny by comparison to large populous nations. So if we wish to open the market to foreign imports it means that we have to fund nationally BRANZ testing for any materials proposed to be imported - in effect pay the way of importers to undercut domestic producers across the board, or alternatively cherry pick only the 'important' materials groups for testing. For the effects of this sort of situation if left unconsidered, see this - https://www.accc.gov.au/update/infinity-cable-recall-act-now-before-its…
http://www.couriermail.com.au/news/queensland/chinese-imported-electric…
Well, I guess the property market isn't that simple to begin with. It is not a wonder that homeowners are looking for tips on moving across town because of this ongoing issue. It does not seem like it is going to end soon enough to convince them to stay anyway. Hence, we should expect the fluctuations to still occur down the road for the next couple of years or so. Many factors affect the situation from various angles and we cannot simply blame one particular party on the whole misleading situation.
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