Take Five: Five changes that could flow from building studies report

Thursday, 4 August 2022

The Government reacts to the Commerce Commission's market study of the building supplies sector.

It was always going to be harder for the country’s competition watchdog to shine a light on what is going on in the building materials industry than in the supermarket industry and the petrol market.

The sheer number of companies operating in the sector and their range of products dissuaded the Commerce Commission from trying to work out whether prices were too high or whether excess profits were being earned by particular firms.

In its draft report on the sector, the commission is not recommending breaking up any businesses in the industry, so what has it decided?

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Vicious circle of conservatism

Former Commerce Commission chairperson Anna Rawlings discusses its draft study into building supplies (video first published in August).

Commerce Commission chairperson Anna Rawlings said it had identified “a circle of conduct” that made it harder for suppliers to get new building products in front of buyers.

Part of the problem appears to be the rigid application of planning regulations that makes it harder for builders to swap out well-known branded products, including Gib board, for alternatives.

That in turn influenced the behaviour of building designers who were looking for the “path of least resistance” for their projects, it found.

The commission isn’t offering an instant fix, but has suggested regulators should be required to consider the goal of increasing product competition alongside issues such as the safety and the durability of products when applying rules.

It is also suggesting a national register of building products that would help manufacturers and builders share information about new or innovative products and building methods.

Housing Minister Megan Woods and Environment Minister David Parker announce a law change that will allow landowners to build up to three storeys without resource consent. (First published October 2021)

Dodgy rebates

The commission found some suppliers were offering distributors volume-based discounts that effectively mean they only get the best price if they shut out rival products.

Rawlings indicated such arrangements could breach the Commerce Act.

The commission had not yet decided to bring any prosecutions, but Rawlings indicated it was likely to institute some kind of crackdown once a law change in April next year makes it easier for it to take legal action.

After that, the commission will be able to prosecute businesses that use their market power to significantly reduce competition regardless of whether it can prove whether that was their intent.

Waiting until then to take action arguably appears a cautious approach, given it is hard to see why else companies would have developed such rebate schemes – but the commission does not like to risk losing lawsuits.

Thou’ shalt not covenant thy neighbour

A lack of scale is an issue in the home-building industry, the Commerce Commission believes.

During the commission’s supermarket study it emerged that supermarket groups Countdown and Foodstuffs had been using land covenants and clauses in leases to prevent competing retailers from setting up shop near their supermarkets.

The commission said it had identified about 60 covenants entered into by major building materials suppliers covering a total of 100 land titles, and 80 exclusive land leases, that appeared to have a similar effect.

It said it was also aware of land covenants that gave suppliers first dibs on supplying building products to owners of some residential land, singling out that as an issue in Hawke’s Bay.

The commission has brought one lawsuit and is promising a “compliance programme” later this year to promote compliance with the Commerce Act.

Itsy bitsy builders

Another factor pushing up the cost of new housing is a lack of economies of scale in the industry, the commission believes.

It estimated about half of new homes in 2018 were built by builders that built fewer than 10 homes per year.

The result was lots of “bespoke” houses and slow productivity growth in the building industry, it concluded.

The commission’s draft recommendations could help promote change in a small way by making it easier for developers to make minor variations to their plans for larger-scale modular housing developments without violating their original building consents.

What the commission hasn’t done

The Commerce Commission isn’t suggesting that Fletcher Building should be required to sell Placemakers or that Carter Holt Harvey should be required to divest Carters.

It noted there was a risk that both companies could try to make life harder for rival distributors by refusing to supply them with their own building products.

But it said that with one exception, which was Carter Holt Harvey’s approach to allocating timber during supply shortages last year, it had not seen evidence of “vertically integrated companies” giving preferential treatment to their merchant businesses.

The report is still in draft though, so there could be more water to go under the bridge on such matters before the recommendations are finalised in December.