Building nailed by soaring construction costs
The construction industry continues to operate at full capacity, but construction costs have reached record levels.
A recent CoreLogic report showed that costs have continued to rise quarterly and annually at a time when construction in Wairarapa is booming.
The report follows recent legislative changes aimed at mitigating the impact of the global plasterboard shortage and comes ahead of a highly anticipated draft report from the Commerce Commission on Residential Building Materials, due out next month.
Wairarapa builders, however, said the current climate should be seen in the context of ‘boom and bust’ building cycles and were not holding their breath for the competition watchdog’s sweeping recommendations.
CoreLogic’s Cordel Build Cost Index [CCCI] showed that the cost of a standard 200m² house with three bedrooms and two bathrooms rose by 2.6% in the second quarter of this year, taking the annual growth to 7.7% – the largest increase since the launch of CCIC in 2012.
CoreLogic’s chief real estate economist, Kelvin Davidson, said the latest figures indicated the industry was under immense cost pressures, with no reprieve in sight, and suspected the worst was yet to come.
“This is the fastest rise in CCIC we’ve seen in a decade, and I don’t expect these price pressures to subside for at least two more quarters, given the shortages of materials and labor pressures,” he said.
Davidson said he wouldn’t be surprised if cost pressures continue to escalate before builders’ workloads ease, expected around mid-2023.
CCIC said new housing consents continued to hover at 50,000 a year, driven by smaller units, such as townhouses, which accounted for just over
half of all new consents.
Wairarapa District Councils have reported record consents over the past year, with South Wairarapa District Council [SWDC] granting a higher percentage than any other council in Greater Wellington.
In the year to December 2021, SWDC granted 17 units per 1,000 people, followed by Masterton and Carterton, on 10 and seven per 1,000 people, respectively.
By comparison, Wellington City Council has only granted four dwellings per 1,000 residents.
Jennian Homes Wairarapa managing director Gareth Norris said the construction industry in Wairarapa was “extremely busy” but expected it to calm down over the next 12 months.
“History repeats itself. There have always been boom and bust cycles in construction.
He said continued price increases necessitated a “much deeper review” of costs on a weekly and monthly basis.
With over 40-50 projects underway for Jennian Homes Wairarapa, the overhead was significant.
“There is a much greater focus on that. There are more stakeholders involved. This is a pre-start and during construction review.
“This puts increased pressure on industry and supplier margins.”
He said fixed price contracts disappeared from the industry a few years ago and the rising cost of supplies was not limited to New Zealand.
“It’s supply and demand following the global covid shutdowns.”
Norris said competition in building supplies was a factor, but it was a matter of scale.
“There’s always room for improvement. But it’s part of a bigger, longer conversation that’s been going on for years.
“It’s not just today’s problem.
“You can see a lot of independent competitions in Auckland. Wairarapa is no longer the same.
He said New Zealand was a small player on the world stage and it was difficult to attract multinational construction suppliers to set up shop there.
Fletcher Building subsidiary Winstone Wallboards Limited, which supplies 94% of New Zealand’s plasterboard – Gib – has been accused of monopolizing the market and in recent months failing to see the looming plasterboard shortage.
Norris said Winstone was a major contributor and could be considered an industry leader.
“But didn’t someone foresee this as a problem months ago? That’s the question.
He said expanding consent eligibility to five different plasterboards, other than Gib, was a step in the right direction, but not a silver bullet.
“They evolved quite quickly. It was good. It will help moving forward, but it doesn’t help today.
“I cannot go and buy these products abroad.”
Fletcher Building has exclusive rights to manufacture and sell the various plasterboard products, which infuriates some in the industry, including Simplicity Living, an Auckland-based construction company that is now looking to Thailand to import approved plasterboard.
Norris said he does not anticipate sweeping changes as a result of the Commerce Commission’s investigation into the industry.
“We asked the Commerce Commission to look at fuel and supermarkets, and have you seen any changes there?
“Let’s leave it at that.”
An independent builder from Wairarapa said the industry suffered from a severe lack of competition.
He said while he hoped the watchdog would shake up the industry, he didn’t expect any major recommendations.
He said it was a mystery how suppliers continued to justify price increases while selling the same material.
“Every month you go there, the prices go up. It’s just greed.
“Prices are doubling and tripling. I think someone is taking advantage of the market.
The builder, a 58-year-old industry veteran, said it was not yet facing supply issues with a renovation in Martinborough, but rising costs are expected to become a factor before the end of the year on a new construction of 250 m². He said builders had to constantly monitor costs and customers were forced to absorb the costs.
“It’s really the price of the wood and the Gib panel. I don’t see how they can justify it.
“A house that cost $600,000 to build a year ago now costs $730,000.
Winstone Wallboards Limited has previously been the subject of Commerce Commission investigations.
Despite a clear monopoly in the market, supplying 94% of plasterboard to major traders, ITM, Bunnings, Miter 10 and Carters, a 2014 investigation cleared the company of any anti-competitive behavior.
In December last year, the Commerce Commission announced an inquiry into the residential building materials industry, the third market study after delivering findings on retail fuel and supermarkets.
At the time, Commission Chair Anna Rawlings said residential construction was an important part of New Zealand’s construction industry and was key to ensuring housing supply could respond to the request.
“Various industry reports have raised concerns about rising construction costs, and this study allows us to examine the industry’s approach to key building materials and the efficiency competition within the industry, and where it can be improved,” she said. said.
So far, 25 submissions have been made and a draft report for consultation is due August 4.