Are Kiwis being ripped off blind for building products or are we getting value for money in our country considering the nature of the New Zealand market? There are those who argue black and blue that one or the other statement is true.
Housing and Urban Development Minister Phil Twyford is so concerned about the costs of building materials, he has promised an investigation.
“The Productivity Commission has estimated we pay between 20-30 per cent more for building materials in New Zealand than they do in Australia,” says Twyford.
In the other camp, Building Industry Federation chief executive Bruce Kohn says the notion behind an investigation is “ridiculous nonsense”.
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When maverick businessman and founder of 2Degrees Mobile, Tex Edwards renovated his Waiheke home, plasterboard cost $24 a sheet.
“Anywhere else in the world, plasterboard is as cheap as chips,” he says.
Edwards, who spreads his time between New Zealand and London, paid £2.75 (NZ$5.30) for the same quality of plasterboard for his London renovation.
The problems, when it comes to the cost of building materials, start with our tiny market and the tyranny of distance, says Professor John Tookey, Head of Department, Built Environment School of Engineering, Computer and Mathematical Sciences, at AUT University.
“There is a simple rational answer,” says Tookey. “We are 3000km from the nearest big economy. We have small demand at the end of a very small supply line.
“We have a population the size of Sydney spread over a country the size of the UK. As a result, builders’ merchants and suppliers have to be widely spread,” he says. “We have a huge amount of inventory, ‘forward deployed' at stockists around the country. Consequently NZ has a huge amount of overhead in the system.”
Tookey says there are around 400 builders’ merchants and related businesses.
Kohn adds that builders’ merchants act, in effect, as a storage depot for all the small builders operating with a dog and a ute.
“They can’t afford to hold the stock, so the merchants hold it. That reflects the geography of the country.”
While there are cheaper building products abroad, it can be comparing apples with oranges, says Tookey. “You can ship in containers from China. But you don’t have the technical support and return to base. If you get a couple of containers of plasterboard that is goosed from China who are you going to send it back to?”
What’s more, comparing prices with overseas countries is fraught with difficulty because of other countries’ dissimilar standards, regulations and sometimes simply different standard sizes.
Never as simple as it seems
Material costs are only one of the many strands that make New Zealand’s housing expensive. The others include land supply, infrastructure, labour costs, skills, delivery mechanisms, and innovation.
Matt Curtis, senior research analyst at Branz, says different building regulations in other countries affect material prices. What’s more, quality varies.
“A recent presentation at the Building Officials Institute of New Zealand conference mentioned how badly Australian new-builds are performing,” says Curtis. “But we still compare our construction costs to Australia. It is not necessarily a fair comparison.”
There is no natural comparison country that is going to make benchmarking meaningful. Canada, says Tookey, gets the halo effect of the United States’ 340 million people over the border. Even the definition of a large order can’t be compared.
“A large order in New Zealand is eight units,” says Tookey. “That is trivial. We are talking about tens of thousands in Australia.”
What’s more, house building is concentrated around Melbourne, Sydney, Brisbane and Perth, with costs in outlying areas greater.
“So if you had a Bunnings Warehouse in Wagga Wagga, you can fully expect it won’t have as good prices as a Bunnings Warehouse in the centre of Melbourne,” he says.
The bespoke nature of New Zealand building also creates a problem that leads to higher materials prices. Here every single house is individual and there’s no such thing as standard designs.
“That has consequences. You need a standard design for economies of scale,” says Tookey.
Contracts in New Zealand are small with minimal strategic depth, he adds.
“If you go into any group build shop they will take about their ‘standard designs’,” says Tookey. “There may have 40 of them and any or all elements of the design can be changed.”
Tookey adds that New Zealand’s small market means that the cost of manufacture is high.
“The machinery and investment in infrastructure to manufacture is optimised for relatively small runs because it has a relatively small economy.”
Smoking guns
Nonetheless there are a number of “smoking guns” in the world of building materials in New Zealand that suggest we’re paying way more than we should be, says Edwards who has been studying industrialised manufacture of houses in Europe, Asia and the USA.
Edwards’ smoking guns are:
1) Rebates and other incentives paid to builders to use certain products, which aren’t disclosed to consumers. “This basically amounts to undisclosed commission.”
2) The minimal $5000 fines for the individuals involved in a price-fixing case in Auckland in 2014 involving Carter Holt Harvey (CHH) fixing timber
prices with Fletcher Building’s distribution arm. CHH itself was fined $1.85 million.
3) The HHI ratio of Fletchers core products. The Herfindahl-Hirschman index (HHI) is a measure of market concentration.
4) A Commerce Commission’s investigation into alleged anti-competitive actions by Winstone Wallboards, a subsidiary of Fletcher. The commission concluded that it didn’t think Winstone had breached the Commerce Act. Edwards' argument is this shows competition law to be weak in New Zealand.
5) The final smoking gun, says Edwards, is the difficulty competitors such as Knauf have moving into New Zealand.
Verney Ryan, co-leader of Beacon Pathway Inc, which reported into building costs, says another problem is the number of hands products pass through before being paid for by the home owner.
“One thing we did notice (in the research), was the way that margins compounded every time that materials changed hands from supplier to merchant through builder to homeowner. By the time we pay for materials as a homeowner, a large bulk of the cost may be made up of margins added on to margins and clipped along the way.
“Sometimes this is not especially transparent to the final purchaser/home owner, either,” says Ryan. “Some of us might understand that a builder or tradesperson adds a margin to product to cover the time to pick it up and deliver it to site, transport it etcetera. But how much is fair is less clear — 10 per cent, 15 per cent, 45 per cent?
“It is not well regulated or understood. As a homeowner, we just see a final invoice for a product and labour — and most unwary homeowners may have no way of knowing what a fair retail price for that product is,” says Ryan.
Building Industry Federation chief executive Bruce Kohn is dismissive of any suggestion that materials costs are overly high in New Zealand. “It is never simple as a straight statement that material prices are high. We regard (the suggestion that materials prices are high) as a load of old cobblers.”
“What you often see quoted is a complaint by the Productivity Commission that New Zealand building costs are 25 per cent more than Australia. But a report from the NZIER said that is absolute rubbish.
“Their conclusion was ‘we might have expected to find lower building costs due to lower labour costs but we do not find any robust evidence that costs of building is significantly more in New Zealand than Australia’,” says Kohn.
“One of the problems trying to do this comparison is we have two to three levels of pricing. Retail, trade, and volume discount for big developers who pay a bit less. This comparison can get very difficult.”
Benchmarking
In its 2013 report into residential construction, the New Zealand Institute of Economic Research (NZIER) commented that the benchmarking of material costs is difficult because homes in the various countries are built in different materials.
“Rather, we used published quantity surveyor international cost comparison estimates of what is typically built in different cities. This avoids the need to specify a similar dwelling.”
The authors added that terrain, geological risks and managing climate in different countries all led to differences in building material prices.
While the public and even politicians may believe that the likes of Fletchers and Winstone are bleeding Kiwis dry, the reality is somewhat different say other observers.
“Fletchers and Winstone are highly successful in what they do,” says Tookey. “But if you charge super normal prices you will suck in competitors. Why would you want to do that?” says Tookey.
“Is it a profit? Yes. Can it be cheaper? Probably. But at the same time who is going to supply the market in the long term?”
Suggestions of a materials price enquiry was political low hanging fruit, says Tookey.
“It is easy to have a poke at them than anything else. The practical reality is you are not going to get (costs) down for KiwiBuild unless you have major orders and that needs economies of scale.”
Rebates
When Twyford revealed the investigation he said the industry was rife with rorts and anti-competitive practices.
“That is because we effectively have a duopoly in New Zealand. Add to that rebates and junkets given to builders to use certain products. The industry is far too uncompetitive.”
The rorts are one of Edwards’ main complaints about building materials prices, which further hinders competition.
“There isn’t corruption in brown paper bags,” he says. “But there are rebates, which aren’t allowed in other parts of the world. If I am building a house or five houses in a year and I spend $50,000 on Gib, I get rebates from my supplier.”
This and the junkets add to the overall cost of the materials.
However, Tookey says even though it’s almost inevitable that other competitors are being kept out through the use of these types of rebates, it’s natural for companies to protect their interests.
“If you didn’t do it in that way, there would be substantially more competition,” he says.
Twyford says the enquiry can’t happen until the Commerce Amendment Bill currently
before Parliament gives the Commerce Commission stronger powers to conduct market studies and take action against anti-competitive behaviour.
The Bill would enable studies into market competition and give the Commerce Commission new enforcement tools.
“Once Energy Minister Megan Woods has conducted her market study into the fuel industry, I’d like to ask the commission to examine building costs,” says Twyford.
