I’ve been saying for a while now that the construction sector is under pressure – there are too many people wanting things built, and not enough builders to do the work.
That’s a simplistic view, as construction companies can put in overtime, hire more people from overseas, or look for more efficient ways to build. But we’re certainly at a point where builders are very busy, and where we can’t speed up the rate of building much faster without it causing major cost increases.
These sentiments were echoed by Nick Smith the other day:
Housing Minister Nick Smith… said the building industry had now used up all its spare capacity and faced serious constraints with skilled labour, materials and equipment.
“In terms of the supply of tilt slabs for apartment buildings, the sector is so overwhelmed with orders that they have to go outside Auckland to get product delivered for as long out as February next year,” he said.
“The stories I’m getting from builders are that once we could get a concrete truck at 24 hours notice, now we have to order it two or three weeks in advance.”
He said Auckland Council was also struggling to get staff to process consents and inspect new buildings.
Let’s start with a graph showing the amount of work builders do each year. It’s in “volume” terms, which means that it’s adjusted for price changes. So the graph is really saying that in the last year, builders across New Zealand managed to carry out a larger “volume” of work than they ever had before, although only slightly more than in the 2004-2007 period.
Note another interesting feature of the NZ construction industry – there are huge swings in the amount of work undertaken in ‘good years’ (economy going well, everyone happy, la di da di da) versus ‘bad years’ (recession, development dries up, mass layoffs, firms go bust). Although there’s strong industry support for government taking a role to smooth out this pattern – i.e. investing in new state houses, schools, roads etc when the economy is weak – we have a pretty poor track record with this in New Zealand.
Here’s graph number 2 – this one showing ‘total paid hours’ in the construction industry. Data source is the Quarterly Employment Survey, which asks a sample of firms around the country how many hours their employees worked each quarter.
This one is even more stark, showing the industry now putting in a lot more hours than it did in the 2007 peak. Other sources show a similar picture – the Household Labour Force Survey estimates that there were 195,000 people working in construction in the 2007 peak, which fell as low as 165,000 during the recession, and has now risen to 230,000.
Lastly, a graph on “real” construction prices. This graph is indexed for inflation, so if the lines are horizontal it means that prices are flat in real terms. If the lines are sloping upwards, it means construction prices are going up faster than general inflation.
Interestingly, ‘non-residential buildings’ are still hovering at around 1,000, i.e. they’ve grown at about the same rate as general inflation over the last 25 years or so. ‘Civil construction’ started to get more expensive in the early 2000s, and has kept on trucking slowly upwards since then.
But the real action has been in ‘residential buildings’, which seem to have bursts of rapid inflation, followed by staying flat for a while (or even reducing after the GFC). Prices have been rising strongly in the last few years – 4.6%, 5.0% and 4.5% in the last three years, whereas general inflation has only gone up 1.5%, 0.3% and 0.4%. So if you’re thinking about adding a new rumpus room… maybe think about holding off for a couple of years.
The main issue seems to be a shortage of workers, more than a shortage of materials (although that will be biting too). It’s particularly unfortunate that construction fell away so much in 2008-2011 – it’s left the industry poorly prepared to cope with the current boom. Taking another step up, even just from 230,000 workers to 250,000 say, will be tricky.