Tex Edwards cooks up a multi course recipe to improve housing affordability in New Zealand. With market failure more government involvement is required, he argues 

By Tex Edwards*
(This article first ran on The Spinoff here and is republished with permission).

What is the problem with housing in New Zealand? Most young people, and families who intend to buy one during their lives see them as being too expensive and unaffordable. Housing supply, housing affordability, and housing quality are elephant-sized social problems impacting our core kiwi values.

But why did the cost of such a crucial lifestyle input run away on our community? Substantially lower interest rates (a consequence of global quantitative easing of monetary policy) as a response to the 2008 monetary crisis caused residential houses to become an investment asset for investors, who faced with getting -1% in bank deposits, started borrowing at 3% interest for assets which yielded 6%. The numbers don’t lie.

These investment dynamics turbo-charged an emerging asset class for baby boomers to invest in for retirement, thereby having investors crowd out entry level buyers. Also in the mix was a peculiar market structure comprised of the building industry, land zoning and taxing so when prices rose more supply failed to hit the market, thereby maintaining pricing.

When there is market failure, governments need to look to market structure, not innovation and new products – that is the confusion technique of incumbents who have the incentive to confuse and delay any government changes.

New Zealand needs new leadership in the industry to help solve these problems, and we need to change the way we talk about the issues. With any public policy problem (and housing is most definitely one), a large problem needs to be broken into several well-defined sub sets. For example, the housing crisis is not one mass problem its really about land supply, investment incentives, regulation, infrastructure and of course, construction costs (and skills).

The moment the building industry’s leadership delivers definitions and problem sub sets – and start setting performance benchmarks and targets – the crisis becomes a solvable challenge. Dissecting the issue means its an easier to find solutions, and hold diverse groups to account. 

Other commentators have canvassed the social problems caused by a broken property ladder, high property costs and the fact that rents are too high, but I’m primarily focused on solutions, economic analysis and international benchmarking.

We have to scale up

THIS PRE-CONSENTED AND PRE-FABRICATED HOME WAS BUILT IN A FACTORY IN MASTERTON.(SUPPLIED)

Industrialised building needs no introduction, and it’s a global best practice solution to improved quality at lower costs, using robots and assembly line techniques to build much of what contributes to the construction of a house.

Even though (as benchmarking illustrates) not all new factories are a success; like all modern technology and supply chain introductions, teething problems with industrialised residential building need to be solved. But about half of all houses in the UK are built by eight scalable building companies – should New Zealand look to a similar market structure? 

We need rapid adoption of large scalable industrialised building techniques, where one or two factories are built to deliver 5000 to 8000 houses a year per factory – this would bring a 10-year-old proven technology to New Zealand, and enables us to catch up with the new production techniques of the EU and USA. This is only possible with a Government contract, as its an industry change which needs scale to drive it.

Kiwibuild has to be the beginning of large, scalable contracts. We need a pipeline of house construction of more than 25,000 houses from new institutional operators who can build scale to challenge the status quo. This is where the Government acknowledge market failure and intervene in an industry; so more of Kiwibuild please. 

A review of permitting and regulatory standards needs to be executed by a new national body, specifically permitted to allow the industrial production of houses. Currently regulatory standards don’t encourage new building systems, and while in part this is protecting consumer interests – particularly after the leaking homes crisis – but in the end the leaky homes crisis has played into the hands of the incumbent building supply firms, preventing new building systems being introduced.

We need a break up

The F word in construction is Fletchers, this is a company which has market power and regularly pays rebates to large customers – a practice which is widely illegal internationally.

A Commerce Commission benchmarking market study needs to be initiated by the government into building materials in New Zealand. Why are eight of the core 15 building materials in New Zealand three times the international price? Why does one company have over 90% market share in a selection of important materials? Fletchers contacted customers recently about increasing the price of Gib plasterboard – really? It’s already 10 times the international price.

The terms of reference for the ComCom study must include a review of section 36 and section 27 of the Commerce Act, to see if weaknesses in this legislation created a lack of competition in building materials. A well-intentioned 2014 study by ComCom into plasterboard basically went nowhere, despite acknowledging there was a pricing and dominance problem. Building materials competition is not just about the price of those materials, its about competition in innovation (and productivity) associated with those materials. 

New Zealand has a unique dominance of one organisation in the provision of building materials – Fletchers – and although its construction division has incurred spectacular losses, the Fletcher building materials division has unique market power which inhibits innovation, price reduction and controls a cottage industry of builders.

It makes sense for Fletchers to maintain their dominance in building supplies; if a new supply chain opens almost definitely pricing will fall and therefore the golden egg of the Fletchers group, the building materials division will have falling profitability.

(DAVE ROWLAND/GETTY IMAGE)

We have to crunch the numbers

There’s not much point focusing entirely on the build side of housing when so much of the cost is tied up in land. I think we need a land commission which revisits the pricing, zoning and supply of land, with terms of reference including looking at the investment incentives to land bank re-zoned land.

We also need Treasury to take a closer look at the new asset class of “buy to rent” houses which is now a legitimate retirement savings asset. The scope of this study needs to internationally benchmark the New Zealand tax treatment of this form of retirement savings and understand the size, scope and format of this asset more formally. This study must include a detailed empirical analysis of the impact of allowing negative gearing on crowding out first-time buyers.

We also need a market benchmarking study by MBIE to better understand what international best practice is. Terms of reference for this study could include how land pricing can be brought down with zoning changes, negative gearing in home ownership, the status of the building materials industry and what is an aspirational best practice cost for an affordable home (minus the land)?

And to truly understand and calculate the value and opportunity, an economic benefits report to be prepared by treasury which delivers an economists’ commentary on the value of a change in the industry structure and achieving internationally benchmarked building costs. It could also consider the detail of changing the investment dynamics of this “buy to rent” culture of people saving for their retirement.

So now what?

Listening to the Minister of Housing Phil Twyford speak at a recent Auckland housing crisis event it was interesting to note he used the phrase “market failure” three times – this gives consumers and the industry prodigious confidence that change is on its way. 

What is the normal formula from central government in and industry change? A ministerial enquiry and select committee enquiry, MBIE review and international benchmarking exercise, Commerce Commission market study followed by a Treasury regulatory impact statement, lots of lobbying and eventually a new act, or a request for proposal issued with urgency to collect ideas and commence industry change.

AN ARCHITECT’S RENDERING OF MOA ROAD AND WALMER RD, PT CHEVALIER (HOUSING NEW ZEALAND)

Ministerial enquiries usually get swamped with lobbyists and status quo advisors who only look for incremental change, and blame the problem on other agencies.  I expect Fletchers will look to confuse, obfuscate and slow down industry change, all the while pitching to government “to help with affordable housing” and further assuring their materials are used.

We shouldn’t allow this to happen, and we need to demand faster action from this government. They could, rather than undertake a review:

• Commit to policy settings of 25% of all new houses built or substantially built (0ver 75%) in factories by 2028
• Commit to reduce building costs by 25% per square metre in entry level houses (our model shows that pricing in-building costs can be reduced by 42%)
• A new tax treatment of development land
• An active programme of international benchmarking

The Minister needs to mandate a series of studies, and benchmarking programmes within government agencies that are responsible for industrial matters, Commerce Commission, MBIE, Treasury, and a new language needs to be created in the industry around land, construction costs and investment dynamics. But most importantly – the minister urgently needs to deliver the Request for Proposals to private consortiums who are researching solutions.

The Government needs to deliver interim milestones, explaining what the New Zealand targets are specifically on land, construction costs and investment incentives – and who is responsible.

House prices in New Zealand will start to fall relative to incomes as industrialised production of housing is introduced, and new land and tax policies are introduced. It’s an exciting time to be in the construction industry in New Zealand, as a series of industry and market structure changes are initiated by a fresh approach from a new government.

*Tex Edwards was the founder of 2Degrees Mobile. He is now a London and Auckland-based company director who has been studying industrialised manufacture of houses in Europe, Asia, Africa and the US.