Many factors push up cost of building new, construction industry says

Thursday, 22 March 2018

Building a new house is an expensive business – and builders warn it's becoming dearer all the time.

Data from CoreLogic shows the cost of building a standard home in New Zealand was 6.9 per cent higher in December last year than at the end of 2016, the fastest rate of growth in five years.

Over that same period, the number of people wanting to build increased, too: September 2017 had the highest monthly number of dwelling consents since 2001.

What's adding to the cost of a new home – and how can we make them more affordable?

The most obvious contributor is land.

Homes.co.nz estimates that the median section price in Auckland is now $582,870. In Wellington, it's $266,788. Christchurch comes in at $228,395 and Tauranga $324,651.

Then there's the cost of turning that land into something that can be subdivided, built on and sold.

The cost of labour has increased over recent years.

All councils impose fees, although they vary around the country. Developer David Whitburn said, in Auckland, compliance costs came in at anything from $100,000 to $180,000 because developers had to provide drainage, driveways and connections to telecommunications and power services. There would also be a development contribution of $25,000 and another $15,000 in Watercare fees.

David Kelly, chief executive of Master Builders, said, while focus was often put on the cost of building consents, there was a lot of other regulation that added expense, including things such as health and safety.

'One thing a lot of people don't factor in is the cost of time. For the average builder, the longer it takes to build, whether through regulation, or access to subtrades, it adds a large amount to costs. They're borrowing money, they have to pay people and keep the business going.'

Labour is also a big cost. The average hourly earnings for someone in the construction industry increased from $26.81 in December 2014 to $28.95 in December 2016, according to Statistics NZ.

Kelly said: 'The industry has got a lot of work on. For the builder it's not just their own staff but subtrades, can they get access to them?'

During peak periods, builders may have to be prepared to pay top dollar to get the contractors they need, when they want them.

The cost of materials also plays a role. A Productivity Commission inquiry into housing affordability in 2012 showed the price of materials for a new home was 76 per cent higher in New Zealand than in Australia.

It said materials accounted for about half of all residential construction costs at that time. Material costs for a standard home increased by 19 per cent in real terms between 2002 and 2011. A third of the cost was due to changes in the materials used.

David Kelly: 'One thing a lot of people don't factor in is the cost of time.'

'Sometimes it's more expensive to buy New Zealand-grown radiata pine in New Zealand than it is in Australia,' said Robyn Phipps, construction professor at Massey University.

The blame for that is sometimes put on the fact that New Zealand has a small number of local suppliers of building products.

In 2014, Fletcher Buildings came to the attention of the Commerce Commission due to its 94 per cent share of the plasterboard market. Phil Twyford, then Labour's housing spokesman, said plasterboard was 41 per cent more expensive in New Zealand than Australia and the government needed to do something to tackle the 'market monopoly'.

But John Tookey, head of department built environment at the AUT school of engineering, said it was not reasonable to compare the two countries.

'New Zealand has got a population of 4.7 million – Sydney has 4.6m. Sydney has a total area of 13,000 sq km. We have a couple of hundred thousand.

'Straight away there's much lower population density here and a lot more spread-out settlements, all of which need to be supplied. There are 850 builders' merchants in New Zealand and in Sydney about 400. You can demonstrate very quickly how the overheads of servicing the Sydney market is a lot lower than servicing New Zealand as a whole. It's naive to say 'oh Fletcher is rorting New Zealand.'

In some countries, aspects of the build are standardised, such as the size of windows. That allows products to be produced on a scale that is not possible with our bespoke building style.

Phipps said New Zealand needed to reduce bottlenecks in terms of getting consents processed.

'But that's a two-edged sword. You can't have the bar low because we don't want another weathertightness issue. You have to drive quality up and cost down and that's a difficult proposition to have. We need more innovation and investment.'

Tookey said New Zealand was still a cottage industry and the amount of prefabrication being done was minimal – almost everything was installed by hand on site by tradespeople. The country needed to life investment in prefabrication to provide cheaper solutions, he said. That would allow more of the construction work to be done offsite in manufacturing facilities, then transported to the sites.

That would need a volume guarantee or for the government to help fund or support the venture.

Phipps agreed: 'A pipeline is needed so companies know there is working coming and can invest in plant.'

Robyn Phipps: 'Sometimes it's more expensive to buy New Zealand-grown radiata pine in New Zealand than it is in Australia.'

Grant Florence, chief executive of Certified Builders, said there was no indication that the rising cost of construction would change on its own. 'There's no sign as to why it would plateau out.'