Asking the tough questions on housing

New Zealand’s housing and building market is in disarray. Ashley Balls investigation reveals that the real problems extend far beyond the simplistic argument of supply and demand.

The recent publication of new housing consents by Stats NZ is good news; the dam finally seems to have broken as a record number of consents were approved in the year to the end of March.[1] This is great news but no one expects prices to fall. Bizarrely, as housing supply goes up, prices follow. Worse, no one, not even the experts, are questioning any of the basics as to why residential property costs in New Zealand are so high and seemingly set to rise even more.

There is a depressing amount of status quo thinking.

By all measures New Zealand has a housing crisis and little or nothing is being done to address the underlying causes. Government has changed the ‘Brightline Rules’ and then given a hospital pass to developers, builders, land-bankers and everyone else in the supply chain.  As a result, housing affordability in New Zealand is, by all measures, the worst of any developed nation.

In such circumstances the prices would normally be set for a fall (or even a collapse) but in New Zealand there is a resolve that says, in effect, we are different, and prices can only ever go up.

Surely the industry should be considering what can be improved in ways that deliver more and better housing for a lower cost of production. This is especially important in a country where the average national house price has just topped $800,000 whilst the median income is circa $55,000.

I started this article on the understanding there is no ‘magic bullet’ to getting the problems fixed, but there are a huge number of questions which are not being asked and seemingly a terrible lack of interest in learning how others have dealt with the issues – none of which are new or unique. The notion that it is a ‘supply and demand’ issue alone and ‘will sort itself out’ is nonsense. I don’t have all the answers but set out below are the basic questions and some answers.

Does New Zealand have a shortage of housing?

No is the simple answer, as the last census confirmed there are 196,000 permanently empty houses in New Zealand at any one time. That’s sufficient for an additional 10% -15% of population. Broadly, the empty properties fall into four categories: baches, estate properties, ghost homes and those between sale and occupation. Ghost houses are properties bought as a substitute for a bank deposit – on the basis of: why put cash in a bank for a 1% p.a. return when an empty house will give more than that per month, net of rates, taxes and all other costs.

There are believed to be more than 25,000 ghost houses in Auckland alone.

Is there a shortage of land?

No, not when compared with say, the UK with 13 times New Zealand’s population and a smaller land area. Land-banking is a problem. In Germany land-banking doesn’t occur as the lander (states) determine demographically what supplies are required and land is released to meet the known demand. Result, building plots are cheaper than New Zealand, but average wages much higher.

Are building land packages reasonably priced?

No, not when compared with overseas and not when additional costs are factored in like site preparation. Typical site prices within 70kms of central Auckland are $400,000 plus. Some of these sites are not fit for purpose until remedial land works are carried out; e.g. retaining walls, drainage and access. Overseas these costs, which are lower, would be included in the land price.

Do the banks have a role to play?

Yes, especially in the way they fund developers. Typically bank lending contracts require each new development to be set up as a separate company and to be wound up when the last property is sold ‘off the plans’. This makes it much harder for any owner to make a claim for any subsequent leaky building or some other construction ‘fault’ and lets the bank and developer off the liability hook.

Is the average cost on new building in New Zealand justifiable?

No. New Zealand construction costs are $2000 – $2,400 per metre compared with $1,300+ in Australia, yet Australian wages are higher. This is a complex issue which no one wants to address. The issues contributing to the high New Zealand costs are builder productivity[2], bespoke on-site building methods, less standardisation, fewer economies of scale, higher wastage and higher materials costs being the major factors.

Is there a shortage of building supplies in New Zealand?

It appears so but… New Zealand has two major suppliers of domestically sourced building materials and both are pleading there are shortages. There are over 800 builders’ merchants in New Zealand serving a five million population, more than double the number serving metropolitan Sydney – also with five million. In addition, local independent timber mills have all but disappeared in the last 10 years. Inquiries in Australia suggest they are not experiencing a supply problem of basic building materials, but New Zealand is – why? (Overnight news suggests there is some hoarding of framing timber by small builders in the state of Victoria but that underlying supply and demand is sound.)

Is the building supplies industry in New Zealand fit for purpose?

Almost certainly not. If the Covid pandemic has taught us anything it is that ordering and delivery must adapt to meet changing demand patterns and making it fit for purpose. The notion of a builder ‘rocking-up’ to the merchant for a truck load of timber and roofing iron is, well, so last century. Have the suppliers not heard of the web, nor noticed how companies like Amazon are transforming retail across much of the ‘western’ world? It’s not just groceries and takeaway meals either, white goods, kitchens/bathrooms, built-in furniture are all now being ordered online direct by the end user and delivery and installation on fixed dates/prices is considered normal. But not in New Zealand.

If quality software and logistics were applied to builders’ merchants the number of depots would be in rapid decline and prices should fall.

Are consent costs justified?

No, planning applications and building consents have become a ‘cash cow’ for many councils and no one seems to question why councils, who are there to provide a service, are profiteering. This is an issue which like other council services could be delivered on a cost-plus basis. Once again no one questions why the compliance process costs more in New Zealand than say the EU where the regulations are more complex and wages higher. If councils adopted a similar charging model with swimming pools, libraries, sports facilities there wouldn’t be any as the public couldn’t afford to use them.

Are utility connections fair and reasonable?

No, not when compared to those overseas. Worse, are sustainable alternative options routinely offered? Where are the requirements for all new developments to install solar/battery electricity, underground tanked water and independent, on site ‘black’ water drainage? Higher initial costs, certainly but almost zero running costs and free power and water. A 6-8 year payback and 25-50 year use. This questions whether the basic building code is fit for purpose.

How do New Zealand construction times for timber framed single storey houses compare with other countries having broadly similar building codes?

Not well. New homes are getting larger – everywhere except UK, and now the typical new home is 200 – 240 square metres. (This is almost double the size of comparable properties 35 years ago.)

Assuming the site has reasonable access and is not on a slope the time taken to construct a broadly similar home is as follows: New Zealand 26 weeks, Australia 12-14 weeks, Canada 12-14 weeks and the USA 10-12 weeks. There are reasons for the differences, but it is clear New Zealand is very much out of step with the others.

One element readers may not be aware of is the building code requires a New Zealand residential building to have a 50 year life. Having lived in buildings built from the late 18^th century onwards I am appalled. The 250-year-old one is still there, in excellent condition and highly desirable.

Is there sufficient labour to meet current demand?

Yes and No. If New Zealand persists with its century old building methods, there is a shortage. However, if framing were factory built, more standardised joinery used and pre-cut cladding delivered on-site and on time output could be considerably increased from the present resources.

The lack of questioning of the status quo is part of the problem. I am not expecting an overnight change in construction methods nor major cost reduction, but it is clear there are very real problems that extend beyond simplistic supply and demand and have pushed home ownership beyond a significant and growing proportion of the population, which is socially divisive.

I never want to hear again the words; “that’s not how we do things here”. Change is clearly required but cannot happen unless all parties are involved and there is the resolve to deliver a better outcome.

Ashley Balls is a Europe-based legal and business commentator, author, and former NZBusiness columnist. He can be contacted at: [email protected]  His other articles on New Zealand’s housing market are here: https://nzbusiness.co.nz/article/nz%E2%80%99s-housing-prices-opportunity-or-crisis and here: https://nzbusiness.co.nz/article/nz%E2%80%99s-housing-prices-opportunity-or-crisis