Submission to the. New Zealand Productivity Commission. Inquiry into Housing Affordability

Transcription

1 Submission to the New Zealand Productivity Commission Inquiry into Housing Affordability 3 August 2011

2 Introduction Fletcher Building is pleased to make the following submission in response to the New Zealand Productivity Commission s inquiry into housing affordability. In terms of the scope of our response, we have not set out to address all the issues raised, but have confined our comments to areas in which we have experience and sector expertise. In particular, our experience in the construction of new houses is largely confined to the Auckland region, so we have limited our comments to that region where applicable. We are supportive of the approach of the Commission to the issue of housing affordability and believe that the structure of the inquiry is well founded. 2

3 Overview Remarks In looking at housing affordability and the cost of new housing construction, it is instructive to break the cost down into the key constituent parts. Our own analysis of total housing costs indicates that land is the primary determinant of cost, followed by materials, project management costs, labour, and regulatory costs, in that order. This is shown in figure 1 below. Figure 1: Approximate cost breakdown of an average 149m2 residential home Source: Department of Building and Housing, Quotable Value, BRANZ Report No 196 [2008] Fletcher Building Perspective on Productivity in Housing Sector Fletcher Building s view is that further productivity gains in the housing sector will be driven by increased availability of quality land for development, greater standardisation of building systems and materials, and growth of scale home builders. Building system standardisation will allow more efficient use of materials and labour both in manufacturing and installation. In markets such as Australia and the USA, scale home builders have helped improve building productivity through their ability to drive uptake of standardised product offerings and bring mass customized homes to the market 1. Scale home builders require sufficient developed land to be available to leverage their model across multiple build sites. 1 BRANZ Study Report No estimated scale home builds were 15% cheaper than customised builds 3

4 Currently in New Zealand there are three main barriers to these productivity enhancing factors: 1. A fragmented home building industry: New Zealand s residential construction industry is often characterised as a cottage industry. Compared with Australia there is a much smaller proportion of group home builders and multiunit home designs. This is illustrated in the graph below for the year ended June Figure 2: Estimate of size of builders in NZ and Australia and nature of dwellings built Source: Statistics NZ, Australia Bureau of Statistics, What son Report Limited, Fletcher Building estimates 2. A preponderance of customized house design: Home designs are much more customized than in Australia. This appears to be driven by the significant role played by small developers and owner builders, as well as scale home builders responding to consumer preferences. 3. The limited availability of land, especially in major centres: Low land availability acts as a barrier to productivity through inhibiting the development of group home builders and large scale developments. 4

5 Response to Specific Issues Raised Urban planning, design and land use policies Q28. What are the relative costs and benefits of intensification and expansion (greenfields development) to urban planning? What research literature and overseas developments are most relevant to NZ? There are benefits and costs to the construction of high density and expansionary developments. The Auckland region needs both to continue to meet the demand for housing. New Zealand s market demand, market structure, climate and geography are unique, and therefore reference to overseas literature is of limited use. We believe that New Zealand building and construction industry knowledge and expertise can be leveraged to provide better outcomes in this area. Q29. How do these different approaches to urban planning support competitiveness and economic growth? Local authorities desire to increase the intensity of housing in Auckland is at odds with consumer preferences, and therefore market demand. It is challenging to generate adequate margins on the construction of high density dwellings in the Auckland region. This is because of the increased build costs per square metre for higher density housing, and consumer tastes which places a lower value on higher density housing. It is possible that some builders may compromise on quality to reduce build costs which has negative long term implications. As a result of the higher relative build costs and lack of demand for higher density housing, few are being built. Q31. In NZ, do home owners prefer living in dense urban settlements or less dense suburban developments? What are the reasons for this preference? In Auckland, standalone dwellings in the suburbs are strongly preferred. From this desire a home owner then compromises on the type of dwelling (townhouse, terraced home, duplex), location or size until the dwelling is affordable. New Zealand s outdoor culture and the perception of homes as a secure store of wealth play a significant role in this preference. Q32. Has there been a reduction in the rate of land release, either at the urban fringe or in in fill areas? If so, why? Land supply in Auckland was controlled by the Auckland Regional Council under its Metropolitan Urban Limit (MUL). Very small amounts of land have been released through MUL extensions since its adoption. This severely restricts the development and supply of houses in the region. 5

6 The purpose of the MUL was to confine and intensify urban living particularly along major transport routes. Q33. Are local authorities land release policies enabling or constraining the supply of land for development? The Auckland MUL significantly constrains access to land. Progressively extending the MUL would enable land to be re zoned from rural to urban use and assist with increasing the supply of residential land in the region. Q34. What is the likely minimum lead time for release and development of new land and housing? In the Auckland region, the land development and housing construction process (including the application process for MUL extension) takes between five and ten years. An amendment to the MUL in the Hobsonville and Massey North areas was notified on 31 March 2005 and operative from 12 March In this example five years was required to create additional urban land available for development. The residential construction process commences following the MUL extension. Q35. Is land release delayed unnecessarily either by inadequate supply of infrastructure services or a lack of responsiveness on the part of infrastructure service providers? If so, to what extend is this affecting development costs? Infrastructure services affect the timely supply of land. A key consideration for council when extending the MUL is the availability of adequate infrastructure services. Q36. Are planning policies that are designed to encourage higher density housing consistent with, and flexible enough to accommodate, changing community preferences? Community preferences change over long periods of time leaving sufficient time for planning policies to adapt. Land zoning determines the intensity of dwellings. There is some flexibility within existing processes to subsequently alter land use zoning, although this is typically slow and time consuming. Clear and consistent planning rules and zones are necessary to ensure appropriate urban design. Q37. Is there evidence of land banking by some developers? Is this a problem? Investors typically purchase land with the intention of making capital gains. Some of this land is not quickly available for development. This has been exaggerated recently given the flat housing market, meaning that land has not been released for development or resale. This will become a problem for the industry if the land is not made available when market demand improves. 6

7 Q38. Is the current planning regulatory system more complex and fragmented than it needs to be? Does the planning system include elements that detract from quality urban development and impose unnecessary costs and uncertainty on developers? The current regulatory system is complex. However, there is a need to control the design and construction of the urban environments through the administration of a set of specific rules. The fragmented and complex rules add administrative costs to the construction process. In addition, the time taken to obtain consents is variable and uncertain which affects the efficiency of the construction process. Q40. Do local authority planning schemes and approval processes create unnecessary costs? If so, how could they be improved? Significantly more information is now supplied to local authorities than was previously required. This adds administrative costs to the land development and residential construction process. This increased information does not appear to have had a corresponding improvement in the quality of housing stock and its environment. Q41. Do external or third party appeal mechanisms unnecessarily delay planning approvals? This is not an issue for the vast majority of residential developments. Building controls Q49. What effect have the 2004 changes to the Building Act had on housing prices and affordability? While the improvements to building codes have slightly increased some materials costs, there have been corresponding improvements in the safety and durability of housing stock. Q50. What evidence exists of unnecessary or inappropriate regulation of building? Is there evidence that such regulation is adding unnecessarily to building costs and that the cost of building regulation exceeds the benefits? Fletcher Building is not aware of inappropriate or unnecessary building code requirements. Q51. Compared with overseas, are there specific NZ conditions or peculiarities that necessarily require additional or more cost building controls and standards? For example, NZ s geography, topography, seismic activity, wind conditions, water quality, etc? New Zealand s geotechnical environment requires tighter building controls to ensure the resulting housing stock has been safely constructed. The code appropriately incorporates these factors. 7

8 Q52. To what extent does the building code encourage or accommodate medium to high density housing? The building code adequately accommodates high density housing. Q53. Is there evidence of unnecessary delays in approving building consents? If so, what factors are causing any delays and how could the approval process be streamlined? In the current market, the length of time required to obtain building consents in Auckland is acceptable. However, if demand returns to the region, local authorities will need to accelerate the consent process. A failure to do so will result in the delay of residential construction and the supply of new homes to the market. Performance of Building and Construction Industry Q54. Are construction costs higher than they need to be? If so, why? Construction costs are based on the supply and demand dynamics of the relevant industry segment. There are no peculiarities when compared with other New Zealand industries which materially alter these dynamics. Q55. Have rising construction costs contributed to rising housing prices and affordability in New Zealand? Have construction costs increased because the level of building activity has risen more rapidly than supply capability? What other factors are relevant? The chart below illustrates the increase in house prices in New Zealand since The price movements of the key inputs (land, labour and materials) are outlined on the following pages. Figure 3: House prices 4,000 REINZ House Price Index Index (Jan 1992 = 1000) 3,000 2,000 1,000 Jan 92 Jul 92 Jan 93 Jul 93 Jan 94 Jul 94 Jan 95 Jul 95 Jan 96 Jul 96 Jan 97 Jul 97 Jan 98 Jul 98 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Source: REINZ Average Sell Price Average Sell Price CPI Adjusted 8

9 As illustrated at the beginning of this submission, land is the primary determinate of cost in residential houses. The trend in house prices illustrated above follows a similar trend to that of land (section) prices outlined below that is, very strong growth between 2004 and Figure 4: Section prices 6,000 REINZ Section Price Index 5,000 Index (Jan 1992 = 1000) 4,000 3,000 2,000 1,000 Jan 92 Jul 92 Jan 93 Jul 93 Jan 94 Jul 94 Jan 95 Jul 95 Jan 96 Jul 96 Jan 97 Jul 97 Jan 98 Jul 98 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Average Sell Price Average Sell Price CPI Adjusted Source: REINZ Materials costs comprise approximately 30% of residential construction costs. The chart below illustrates that the prices of inputs into the Construction industry have increased by more than the average. Prices of many of the materials used in the construction process are dependent on both international commodity prices and the relative strength of the NZ dollar both of which have moved considerably over the period illustrated below. 9

10 Figure 5: Producer price index Source: Statistics NZ Many building products are energy intensive to produce, and one of the factors influencing overall costs has been the rising price of oil and other energy sources, as evidenced in Figure 6. Figure 6: US Crude Oil Price USD per Barrel Dec 1991 Aug 1992 Apr 1993 Dec 1993 Aug 1994 Apr 1995 Dec 1995 Aug 1996 Apr 1997 Dec 1997 Aug 1998 Apr 1999 Dec 1999 Aug 2000 Apr 2001 Dec 2001 Aug 2002 Apr 2003 Dec 2003 Aug 2004 Apr 2005 Dec 2005 Aug 2006 Apr 2007 Dec 2007 Aug 2008 Apr 2009 Dec 2009 Aug 2010 Q56. To what extent is the market structure and lack of economies of scale in the New Zealand market a factor in driving the costs of building materials? What are the barriers to achieving greater economies of scale in New Zealand? As we have already referenced, New Zealand s residential construction market is highly fragmented. Large scale home builders (greater than 100 homes per year) account for 18% of the market. This compares to 36% in Australia. As outlined earlier, scale home builders 10

11 can drive efficiencies in the construction process by standardising their material requirements and using labour effectively across job sites. There are significant barriers to economies of scale in New Zealand, driven by our small population, geography and inadequate infrastructure: o New Zealand has a small and dispersed population when compared with countries with a similar land mass. New Zealand s population density of 16 people per square kilometre is lower than the UK at 249 and Japan at 337. o The lower aggregate demand for construction services and building materials means it is harder to generate economies of scale. This is particularly apparent in capital intensive manufacturing processes for example steel reinforcing bar and cement. The manufacturing process scale is small by international standards but still results in excess capacity in New Zealand. In Australia, steel plants are typically 3 to 4 times larger than those in New Zealand in terms of manufacturing capacity. o New Zealand s lack of transport infrastructure and mountainous terrain add costs to the construction process. The higher cost to freight goods around NZ results in replicated manufacturing facilities and significant surplus capacity. Large volumes of building materials are transported around Australia using the rail network. This enables manufacturing capacity to be better utilised (and avoids unnecessary investment and duplication) and therefore assists in the reduction of selling prices. As previously noted, barriers to driving further economies of scale in NZ are fragmented house building industry structure, preference for bespoke designs as well as limited land availability. Q57. Are there any concerns with the level of competition in the building materials market or any other part of the building and construction supply chain? Fletcher Building manufactures a range of building materials including glasswool insulation, cement, reinforcing steel, plasterboard, steel roofing and ready mix concrete. Most of these products are internationally available commodities and all of these products are subject to some level of competition or competitive threat from local manufacturers and/or importers. The import constraint is a significant one, given New Zealand s proximity to the larger scale and significantly lower cost Asian facilities. Most of these products also exist in broad market categories where they compete with a range of substitutable products for example, polyester insulation competes with glasswool insulation, and concrete or clay tiles can be used instead of long run or steel tile roofing. While Fletcher Building is the major manufacturer of plasterboard in New Zealand, imports have been increasing over time, and as a commodity product that business has had to be innovative and service focused in order to maintain its position in the market. Nevertheless, imports have been growing. 11

12 The other significant building product in the standard house lot bundle is that of timber something that Fletcher Building does not manufacture. Structural timber is an internationally available commodity product, and as a result the domestic price is driven by the global demand, which in recent years has been significant from the growing Asian economies. The building supply chain in New Zealand comprises a large number of general merchant distributors, all well known to the public and the trade. This part of the supply chain is very competitive, with a large number of new premises constructed in recent years which are available to serve all levels of the market from DIY through to the trade participant. The graph on pages 15 and 48 of the Inquiry Paper confirms that, since 2000, house prices have increased significantly in relation to disposable income, rent and in particular residential construction costs. Given this, it follows that if there was an issue with the level of competition in the building and construction supply chain, we would have expected to see this line rise much less steeply over the same period. Q58. Why is there not more standardisation in New Zealand s building and construction sector? Is this driven by consumer preferences or industry approach? As previously noted, barriers to driving further economies of scale in New Zealand are the fragmented house building industry structure, consumer preference for bespoke designs, as well as limited land availability. Q59. Have skill shortages in the housing and construction industry contributed to rising housing prices and reduced affordability? Are such shortages temporary or are there long term issues? Have the costs of skills shortages been more significant in particular regions? What impact will the Christchurch rebuild have on skill shortages in the housing and construction industry nationally? Fletcher Building has historically experienced periods of skill shortages at the top of the cycle. This was apparent across a range of skilled and semi skilled trades and was only alleviated by declining demand. Increasing demand is likely to result in a return to skill shortages in some areas. Q60. Are there differences in productivity between residential and commercial construction sectors? If so, what is driving these differences? The commercial construction sector has increasingly adopted tools and techniques of standardization in building systems. Similarly there are fewer commercial construction firms than residential builders leading to a greater concentration of skills and sharing of best practices. 12

13 End of submission. For further information, please contact: Philip King General Manager Investor Relations