By Mike Blackburn*
I was recently asked about the increasing cost of building supplies and the pressures facing the construction sector.
Specifically, the question was; was it really taking between two and three years to get a house built?
My initial response was that despite issues with the price and supply of some building materials, most builders were still able to complete housing projects within standard time frames.
However, that got me thinking.
When you look at the whole process of building a house, the entire industry is pretty much at peak capacity. Currently the residential construction sector is applying for more building consents than ever before, and this puts pressure on all parts of the system.
Let’s start with land. If you can find a section here in Canterbury, it is likely that you won’t get “title” until the end of next year, that’s 18 months away. Demand for land is so high, that group housing companies are buying up sections in lots of 20 or more at a time. This is squeezing smaller builders out of the market, let alone private buyers. And it all leads to one thing, a significant increase in prices.
On top of this, continued development of new green field subdivisions are limited by the need for new infrastructure to support these developments. Despite the Governments $3.8 bln infrastructure fund, this is long term development. Projects of this nature take years in planning and development and money alone won’t necessarily speed up the delivery.
Then there is the building consent process. Because of the volume of building consent applications, Councils are under tremendous pressure to process the current flood of applications. MBIE requires Councils to process a building consent application in 20 working days. Christchurch and Selwyn Councils are currently taking almost twice this time. I understand that both are actively looking for more staff (like everyone), but this takes time, and skilled staff (in this particular field) are hard to find.
Builders are flat out. I have just completed a survey of local builders, where almost everyone says that they will build as many, if not more houses in the next 12 months than they did in the previous year. This means sub-contractors are in demand and there are only so many of them to go around.
Given the recent pandemic lockdowns and the current government policy on restricted immigration, builders and sub-contractors can’t get more staff to keep up with the increasing demand for work, which in turn limits the number of projects able to be completed.
It's no secret that imports of building materials and all goods into New Zealand are in limited supply. Again, this is driven by the global lock-downs, and the international supply chain and logistics are under severe pressure. The cost of shipping has risen significantly which all puts upward pressure on the price of building materials.
Add all of these things up and you have a building industry that is at capacity and stressed to breaking point.
So the questions is … how long can this go on for?
On a positive note, it looks like the demand for new housing is still strong. It is demand that drives this industry. But there will come a time (if we aren’t there already) where we reach the absolute capacity of the sector to build any more.
In my opinion, the ongoing upward surge in the number of building consents simply can not continue. It is beyond the building industry's capacity to meet this continued level of demand.
Building consent numbers must surely level off by the end of this year. History tells us that the construction sector works in cycles. This current “building boom” has been with us for 10 years now, which is extraordinary in itself, and if you look at the graph below, this run is unique with regard to anything that has happened in the industry in the past 30 years (even if we did start from a very low base).
The good news is that as long as the demand for housing continues, builders will keep building. But that buying demand will need to be prepared to pay today's costs.
Mike Blackburn is the principal of Blackburn Management. You can contact him here.
24 Comments
It’s a jobseeker’s market, but that hasn’t translated into big wage rises, according to figures from Seek NZ...
salaries fell in construction, and banking financial services.
Supply and demand is a funny old thing in NZ.
I don't know about construction but it is standard in some industries to advertise a salary just a smidgen too low for Kiwis to apply. Then you can employ immigrants. I'm sure that is how I managed to get into NZ as a computer programmer two decades ago. So why employ an immigrant which adds inconvenience to the employer when at the right price (higher salary) a Kiwi will do the job? Because an immigrant on a work visa will not resign, will not complain, will accept anti-social working hours, will not insist on receiving training that might make him/her employable elsewhere.
Just maybe some of these adverts for construction workers are not expecting to get employees, they merely open the door for foreign immigrants.
That's exactly how it works. Overseas studies have proven that industry wide wages fall as the percentage of immigrants employed in it rises. Its not only low wages being advertised, its also the demand for experience. Employers demanding people with 5-10 years experience, but only paying enough to attract new graduates. This is currently whats going on in the hospitality industry - rather than training up their own staff (which takes a matter of a few days, not years) so that unemployed people from other industries can move into hospitality, they demand already trained staff, and insist on bringing in immigrants to wash dishes, wait tables, and serve beers.
And lastly, many of these employers expect the employee to pay back a proportion of their wages in cash, under the table, as payment for their visa sponsorship. The going rate is around $35k a year, so even if the advertised wage is $60k a year, the employer will really only be paying $25k to the employee. So local workers will never be hired if the employer can find an immigrant worker who is prepared to pay for their visa sponsorship.
Easy to do when you consider how quickly the market can change, when compared to how long it takes for a development to progress from start to finish.
Imagine how many projects could kick off during good times (resource consent, services in the ground, roads/footpaths/kerb) and by the time they have finished dividing the sections/installing fences ready for titles the market starts to turn. What does the developer do? Can't exactly rip out the pipes and get a credit at Plumbing World.
Shoe boxes appearing all over Christchurch as well. There are 31 townhouses, most with no garages or off street parking, being put on a double section next to the train tracks - who wants to live there? We don't even get migrants into this city. I have no idea who is going to rent all these tiny townhouses, where are the extra people expected to come from? The developers are expecting investors to soak them all up, but how long will that last when investors realise that they are extremely difficult to rent, and the rental yield on them is so low that even with interest deductibility they will be in a negative cashflow situation, and unlikely to see much in the way of capital gains for these types of high density homes.
Councils are slowing development because it's in their economic interest to do so, not because there aren't staff available.
Regarding the market generally I notice some types of building commodities (e.g. lumber) have actually come back down as supply comes on-stream.
I wouldn't be surprised if we already have an over supply of houses from what is being built. But are they the type of dwellings people want to live in.
But we can increase demand for houses by increasing immigration. But where are all the new hospitals and schools and motorways and power plants etc to cope with the increase in population? The number of occupants per dwelling is dropping which requires more houses. Like other countries we also have a problem with unoccupied houses. But unlike other countries, we are choosing to ignore that this is a problem.
Indeed, I have friends who are struggling in finding just regular (not cardboard) quality build townhouses when at the same time builders are trying to maximize profits making luxury developments nobody is really asking for except for some investors arriving too late to the game.
Just because something has been consented doesnt mean its going to be built. I'm in a number of new build/renovation groups and people who are getting back their quotes for the work are shocked at the increase in prices. Bricks that used to sell for $3 are now $11. Timber has gone up 300%. Demand for steel has gone up as people switch from timber framing, causing the price of steel to go up 20%. Roof trusses and windows are 6-9 months on order. Many builders are simply refusing to quote, because they can't guarantee the prices they will be paying when the goods eventually become available. Lots of people are backing out of their building projects, and have decided to simply renovate their existing home, or to just sit and wait until things calm down.
The problem will lie with fixed price builders who are going to go broke trying to build homes they contracted for at last years prices. And those who are building homes with no off the plan buyer, as the end prices will push many buyers out of the market (eg. investors, who simply cannot justify the poor rental yields).
Housing is in crisis mode, yet this government has the first draft of the proposed new RMA postponed until 2022??? Why????Draft legislation set to replace the Resource Management Act (RMA) has been labelled “revolutionary” and praised for putting a greater emphasis on the environment and the principles of Te Tiriti o Waitangi.
But there are concerns that any efficiencies that were hoped to be gained from the repeal and replacement of the RMA may be lost due to the bold nature of the changes and the complexities of incorporating new legislation with existing and upcoming bills and frameworks.
A review of the RMA, launched by the Government last term, recommended three new laws to replace the RMA; the National and Build Environments Act (NBA), the Strategic Planning Act (SPA), and the Climate Change Adaptation Act (CAA).
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