AUT’s Briefing Papers initiative has kindly allowed us to syndicate their recent series on housing. The eleventh (and final) paper is written by Auckland Council chief economist Chris Parker:

There are a number of challenges facing the building industry in Auckland, around scale, quality, efficiency and price. Scaling up the building sector raises questions: What are the crowd-out risks for other sectors in Auckland, as the building sector tries to outbid them for labour and materials? How can public policy better support industry to meet various sectors’ needs?

Policy makers have a number of initiatives to help gear up industry for major expansion, including:

  • the ‘Building and Construction Productivity Partnership’ (since ceased)
  • MBIE’s ‘National construction pipeline’ (latest issue was July 2015)
  • Workforce skills roadmap for Auckland construction’ to support skills sector growth.

Recent analysis commissioned by the Council suggests house prices are high because of anticipation of redevelopment opportunities enabled by the Proposed Unitary Plan once it becomes operative.

Builders and tradespeople may move from Christchurch to Auckland as the rebuild ramps down, but capacity challenges will remain.

Productivity

There has been little, if any, measured productivity growth in New Zealand’s construction industry for over 30 years. (One problem is measuring the quality improvements that result from productivity growth.)

The cost (excluding land) to build the average 200m2 house is not far off $400,000 — about five multiples of Auckland’s median household annual income (of approximately $80,000). Contrast this with the ideal ratio of three to one, including land.

The Productivity Commission in its 2012 Housing Affordability inquiry attributes low productivity growth performance in the residential construction industry to:

  • structure:
    • the industry’s small scale and lack of scale economies
    • fragmented industry structure requiring a myriad of subcontractors and informal contracting
    • skills issues
  • conduct:
    • low levels of innovation
    • ‘bespoke’ (tailored) nature of our homes
    • inferior management skills and practice (e.g. project management)
    • councils (as building consent authorities) being excessively risk averse and stymieing innovation in design, materials and construction techniques.

Poor retention and attraction of workers

New Zealand has an issue with attracting and retaining builders and tradespeople internationally, as the figure below shows:

graph-16

Builders advise that this is caused not by barriers to entry, but because it is an unattractive field to be in this country these days:

  • low wages — from low productivity
  • punitive liability rules — 10-year personal liability and joint and several (rather than proportional) liability
  • too little initiative afforded to builders — building inspectors do not afford builders with much leeway to use initiative and deviate from plans because of concerns about quality assurance. Poor project management and quality assurance

Work that I co-led last year for the Productivity Partnership found that project management was:

  • generally poor (but with pockets of excellence)
  • not seen by builders as being particularly useful
  • desired by buyers, but they didn’t really know how to express their demand for it.

Project managing a house build is tough: some 20–25 subbies are required each build (with a high level of specialisation of trades), plus multiple visits from building inspectors.

Better project management can reduce the risk of the highly networked sector coming to a slow grind during peak demand periods. Also if project management is poor, then don’t hold out much hope that quality assurance management processes will be any better. (Builders will often default to ‘if you want a job done properly, then do it yourself’.)

Auckland Council building control staff struggle with significant industry quality issues, with 25%–40% of all building inspections failing. A council’s role ought to be limited to compliance (e.g. auditing quality assurance processes), but inspectors often find that quality assurance isn’t being done at all.

So councils fill the vacuum. That’s because they are liable for potentially all the harm caused by others (because of the government’s joint and several liability rule) and because they have a legally defined ‘duty of care’ to consumers. So they effectively start micromanaging builders, which in turn repels builders.

Move to proportional liability

The government needs to think more carefully about replacing the ‘joint and several liability’ rule with ‘proportional liability’ (like Australia). People and organisations including councils should be liable only for the losses they contribute, not for losses out of all proportion to what they caused. At the moment building firms are incentivised by the joint and several rule to be extremely small for two reasons. One, so that they can personally supervise build quality (rather than delegate). The other, so they can disappear from plaintiffs, and liquidate (or ring-fence assets) so that they are not left carrying all the liability caused by other people.

This change would reduce the incentives for firms to be extremely small, and will help them to achieve efficiencies of scope (i.e. different trades and skills in-house) and scale (i.e. more work). Larger firms can support more management overheads to undertake project management, quality assurance, and investment in staff. Inspectors would likely cut builders some more slack, which will improve efficiencies and help address key issues about attracting and retaining staff in the industry.

The Productivity Commission raised their concerns that current liability rules exacerbate the cottage industry structure, and thus its conduct and poor performance in its 2012 housing affordability inquiry. It asked the Law Commission to consider the impact on industry structure, conduct, and performance when advising the government on whether to keep or change the ‘joint and several liability’ rule. The Law Commission didn’t. So the advice to retain the rule that the government has received is incomplete.

Other changes needed

Other opportunities for improvement and continued development include:

  • supporting large scale residential development
  • investment in new production technologies, such as offsite prefabrication and Building Information Modelling (BIM)
  • opening up new supply chains to mitigate any market power in the current industry (such as importing material from the USA)
  • developing new avenues for product approval as per the Building Code, including adopting overseas product testing
  • creating new housing typologies and design formats (e.g. modular housing and attached dwellings, which may also bring non-residential construction (i.e. commercial) techniques into the residential sector)
  • developing new effective project management approaches and quality assurance
  • developing new processes for building compliance, including private accreditation systems and private sector insurance to help protect consumers from risk
  • supporting skills training (both new recruits/apprentices and more senior skills such as project management, business management etc).

I am also sounding out interest from other local/central government departments to co-commission analysis to assess:

  • where will the resources be drawn from, and which industries might be at risk of crowd-out from an expanding construction industry[1]
  • what support those industries may need for Auckland’s longer term prosperity
  • where emphasis should be placed on improving the quality of construction sector regulation.

Outlook

There has been a lot of focus on how land use regulation affects Auckland’s house prices. But that may be largely overcome once Auckland Council’s Proposed Unitary Plan is updated and becomes operative, possibly by late 2016. Challenges in the residential construction sector, though, will need to be addressed if housing supply is to increase fast enough to meet demand.


[1]      This may involve CGE (computable general equilibrium) modelling. The work could also build upon the following publication: Department of Labour (2011) Labour Market Adjustment in the Construction Industry, 2001–2009

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41 comments

  1. And that folks is why I’m no longer a builder. Who in their right mind would assume liability for 10 years when they have only partial control over the process whilst earning 75k a year.

    Bugger that.

    1. Why not insure? Also, Builders are renowned for their extensive knowledge of company law. I doubt many hang around for 10 years.

      1. Insure against the shoddiness of your own work? Not sure that’s possible let alone an answer to the problem :p.

        The reality is that most (by my best guesstimate) builders are sole traders with nowhere to run. Not even Aus.

        1. One is able to ensure for legal liability caused by their own negligence. It is quite common all over he world. I would be shocked if it isn’t available to builders in NZ. In fact a quick google shows that is is available.

          1. Yes, I did carry public liability insurance but it’s no silver bullet, it can only protect so far.

            But realistically, how many employees (roughly equivalent to a sole trader) would be comfortable with the prospect of lengthy and expensive court action? It’s not an attractive position when you’re grossing $60-80k yearly.

        2. In the US medical malpractice insurance is universal among doctors and surgeons to cover them against lawsuits brought against them for their own negligence.

          There are a number of institutional and cultural differences between NZ and the US (and the medical and construction industries) but the principle seems transferrable.

  2. When builders stopped using metal flashings and just applied silicon sealant it showed up as an increase in productivity. When everything leaked and they went back to proper flashing systems that showed up as a decline in productivity. Be careful what you wish for!

  3. Awful graph. Two scales makes it highly unrepresentative. Sort it out AUT, you have two Universitys in your name, act like one!

    1. You obviously aren’t a statistician. It’s scaled to show relative change in market place. Very information dense way to communicate.

        1. University x 2 in AUT University. Hence not using universities plural. I have seven years of English teaching experience. Insulting my language skills is very risky 😉

      1. You are obviously not a statistician either (I am). Graphs with diffrent scales on the same axes are known to be misleading. If you want to show two different time series together, they should be normalized.

        1. As I said above, they are normalised (or I think it is reasonable to assume that they are) the axes could have probably been more clear by including a %age with the absolute numbers as secondary info.

  4. Yes what exactly is meant by “productivity”. I would hazard a guess that its pretty meaningless to anyone who isn’t an economist.

    1. Productivity would be referring to how much is built (be that per man hour or per builder p.a.).
      If a builder can double the number of houses he builds a year by using faster/better building techniques (things like pre-fabrication, on site time-management, standardisation etc) then the amount he needs to charge to make a profit is reduced thereby making housing construction costs less.
      While this blog in general doesn’t like the American suburban model (sprawl etc), they do build right however. Over there they can build a house in a fraction of the time it takes here and at a much lower price by using pre-fabrication and larger teams. Once a house is built they move next-door to the next one and it becomes a bit of an assembly line. Same applies to their higher density projects where they build large condominium buildings rapidly. (Oh and they also add in extra’s which we don’t do here much like proper basements and central heating).

      1. Good definition of productivity. I approve.

        One of the things I think this highlights is that the idea of productivity is inherently about the *efficiency of resource use*. As a concept, it shouldn’t just appeal to economists. For example, an environmentalist could critique the unproductive use we’re making of scarce environmental resources like water quality or the global climate.

          1. They’re not precisely the same thing but they are closely related. People do use them interchangeably in some contexts.

  5. The article is very insightful and it tells the exact issues.
    Now we know the problems, how do we solve it? Who can lead those changes?

    I am not a true believer the industry can self regulate and take the leadership.

    1. Seeing that the article says that key issues are OUTSIDE of the industry’s hands, why would you even expect them to do anything about this with self-regulation?

  6. Interesting article. One takeaway from the article: if the average price to build a house is almost $400,000, dropping land cost prices to zero wouldn’t bring us within Demographia’s affordability target.

    1. If land was cheaper a lot of things would change. Most notably smaller, cheaper houses would get built to serve a broader market. Economies of scale would also improve things. Note also that $400K is an average not a median figure.

        1. Land in short supply needs to be rationed. When this happens, higher margin new-builds aimed at the upper parts of the market will be built. Which is why we see a lack of affordable housing in new subdivisions. If land supply was liberalised, more or all segments of the market would be supplied – i.e. small cheap houses as well as large expensive houses.

      1. You will get smaller houses especially on expensive land. There is a lot more people who can pay $300,000 for a 200m² section than people who can pay $900,000 for a 600m² section. You just don’t see a lot of them in Auckland now due to zoning restrictions.

        1. You will without the prevailing density restrictions agreed. I should have said high land prices and limits of 1 unit per Xm2 of land.

      2. Having read his full report my impression was that the $400k figure was based on the average size of new houses and the current market rate for residential construction in Auckland.

        You’re right to say that a number of things would change if the land supply situation was different. But we’re constrained in addressing that due to the fact that 2/3 of Auckland’s area is water or steep hillsides. So rather than speculating about an alternative reality in which Auckland had smaller harbours, it’s worth considering the constraints to using land efficiently.

        1. I was really just responding to Chris O who was hypothesising low land prices. I do think that land prices in Auckland aren’t primarily about geographical boundaries,. Dairy flat could fit a lot of houses on it.

  7. That’s a great paper from Mr Parker.

    From my experience, our spec house builders have not responded well to Auckland’s intensification. Most homes available ‘off the plans’ are single storey brick & tile bungalows with double garages (often dominating the street). To get anything that suits an ‘intensified’ Auckland context, a buyer needs to customise them. Eg , re-orienting the garage door or squeezing it on to a skinnier site.
    More Australian and UK spec house builders have basic templates with options to customise them, eg they are ‘modular.’ This leads to construction efficiencies, but also versatility in appearance and response to site-specific aspects like privacy, solar gain, topography, etc. We need to learn from this.

    Some NZ firms (I won’t name them) have smart spec house designs that are intended for infill housing. Good on them -they’ll be profiting while other firms are lacking these options.

  8. Not a builder or project manager, but I’ve seen a 6 unit build across from my window for the last 6 months, and all of this appears very true. I’ve seen a highly complex mix of dozens of tradespeople and an apparent lack of efficiency – the project is still a long way from completion despite a simple site and concrete slab construction. I’m not surprised that things cost hundreds of thousands to build in this country.

  9. There are so many things to say……..but I will stick to two points so I don’t lose my ‘post comment’ option…

    1. Unfortunately none of this is news, yet we continue with these issues, and in Auckland, build quality needs to be addressed faster than ‘where the emphasis should be placed’. What does this equate to in practical terms? A report, a recommendation………?
    2. If the average cost of residential building is $2k per square metre, why are we not at least partly addressing housing affordability through house design? I am sitting in a two year old house which has 18.5 square metres of hallway – we have redesigned it to have 6.5 square metres (and it could have been smaller) – so there is $24k. How much is that off our mortgage? Why do architects produce designs that get approved/built/purchased (we know the ‘purchased’ part – lack of other options (I would hate to use the word ‘choice’ after yesterday)) yet waste so much space??

  10. As an owner of an apartment I agree quality needs to be addressed. I recently had my bathroom renovated and was shocked by the standard of the plumbing and building work that was exposed when the previous wall was removed. I was a fraction of the turn of a screw into a badly installed plastic pipe from flooding my neighbors.

    As regards to deviation from plans I have seen the approved plans for my building, they are nothing like what was built.

    I can understand the council building inspectors being cautious over new building techniques having seen what has happened in Auckland. My concern is that builders are not accountable for shoddy work and that the council after approving the work is paying compensation for bad work when it should be the builder/tradesman or the builder/ tradesman’s insurance company.

    The issue in Auckland is that too many properties are built by developers who deliberately liquidate their companies to avoid liability and go bankrupt but still remain managing new developments.

  11. Oh one more thing I have noticed that has got to be costing an absolute fortune and has little real benefit is the massive amounts of earthworks being done on subdivisions these days! Literally they are removing all the topsoil then shifting half a bloody hill from one place to another then putting up huge (expensive) retaining walls etc. Sure they get a nice flat site to build a house on but most of the time the builder still does more earthworks anyway for the foundations. This is a guesstimate but I would imagine this adds something like $50k to the cost of an average new section. Compare that to building as is with a bit of minor earth works on each section that might cost a fraction of that. Not too mention the runoff from the massive earthworks and the expensive ponds built for it. Or the process that seems to take a year to do these earthworks which only add to costs.

    1. My suspicion is that developers just copy-paste designs for a flat section into a hilly terrain. Or maybe there is a zoning law telling you need X m² of perfectly flat area.

      1. Depending on the district plan you’ll have different requirements for the size of land that can be built upon. It used to be 100m2 (if square 10mx10m, but not required to be square) and now its 225m2 (if square 15mx15m but not required to be square). This is so that someone doesn’t buy a lot to put their house on and find that they can’t.

  12. The idea that NZ should move to proportionate liability is misguided. J&S liability ensures there is someone around who is capable of paying. The cautious approach of the council is a direct result of the leaky building debacle and one should not forget that. Moving to proportionate liability is still unlikely to create scale efficiencies or scope efficiencies as it makes little difference to insured builders. Might make their premiums a little cheaper though.

    1. The point is that it might create *dynamic* efficiencies by decreasing the likelihood that Councils will simply say “no” to innovation in building practices. Because the current system ensures that Councils bear the full cost of any poor decisions, they create strong incentives for conservatism on the part of Council. And, equally, they create incentives for cowboy behaviour on the part of uninsured builders, who know that they can just de-register their company to escape liability if things go wrong.

      1. Won’t that simply create a EQC/Insurance company risk split where the various parties all duck for cover hoping the claim is “under cap” so the builders insurance pays?

        Better to have a central “ACC” type “no fault” system for building, which each party to the building contributing their portion of insurance premiums. Sop homeowners only have 1 party to claim from, it then takes on the job of making the cowboys and councils each pay their shares and avoid the homeowner being revictimised by arguments about how much each party is at fault, which is where that idea will go.

        Yes it’ll be expensive, but what we have now is surely worse?

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