Archive | Construction costs

Auckland construction activity ramps up

New homes, public sector buildings and the Auckland economy kept the construction sector bubbling in the June quarter, as activity in Christchurch continued to slow.

Most sectors in Statistics NZ’s gauge of building work put in place are small enough for 1-2 projects to make a big difference in percentage terms. Broadly, from the bottom of the global financial crisis in 2011-12, activity picked up strongly through 2013-14, followed by a lull for the first 3 quarters of 2014, picking up again in the latest 3 quarters.

The total output in the June quarter was 21.1% ahead of that quarter in 2015 – new dwellings up 26.4%, accommodation buildings up 33.1%, education buildings up 27.2%, commercial buildings up 22.3% compared to a year earlier.

Industrial buildings picked up after 3 lukewarm quarters – down 5.4% in the September quarter, up 8.9% in December, down 15.4% in March and up 12.9% in the June quarter.

In Auckland, those 3 quiet quarters last year make the subsequent performance look strong – a 7.7% rise in the March 2015 quarter, on top of a 28.6% in the March 2014 quarter, was followed this March by a 25.6% rise in activity. Activity was strong in the June 2014 quarter, up 29%, followed by a 4.3% rise last June and a strong lift again, up 39% in the June 2016 quarter.

In dollar terms, the value of work on new homes in the latest quarter was 84% higher than 3 years earlier – $2.56 billion (excluding gst) versus $1.39 billion. For the June year, the value of $9.33 billion was up $1.3 billion (15.9%) on the previous year, and up 122% ($5.13 billion) on activity in the June 2012 year.

The steep rise in residential activity over those 4 years hasn’t been matched in non-residential sectors. The total of all residential work, including additions & alterations, was just over double the level of 4 years ago – up from $5.5 billion to $11.4 billion – but non-residential work has risen over 4 years from $4.45 billion to $6.63 billion, an increase of 49%.

Quarterly activity in Christchurch has exceeded $1 billion since September 2014 ($1.16 billion in the latest quarter, up 6.5% on a year earlier).

Auckland went above the $1 billion/quarter mark in the September 2013 quarter and, in the latest quarter, the $1.83 billion of construction work was $1 billion above the level at the bottom of the market in 2011-early 2012. It’s also up $500 million on the level in June 2015.

Attribution: Statistics NZ tables.

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Dibble says construction cost inflation keeps pressure on pricing

Colliers research director Chris Dibble says in his latest report, out on Friday, that demand outweighing supply in a low interest rate environment isn’t the only reason rents & capital costs are expected to continue appreciating.

“Construction cost inflation for new residential & commercial buildings shows just how much pressure there is on prices to keep rising,” he said.

“Since the mid-1980s, construction costs have increased phenomenally. The construction cost price index – as derived from Statistics NZ’s capital goods price index – shows just how much this growth has been.

“Despite cost pressures in the residential sector being below the commercial sector pre-2000, this changed in early 2003. Between 2008 & 2011, residential cost pressures for new-build properties stabilised after the global financial crisis, but were soon to go exponential along with house price rises.

“Meanwhile, commercial property construction prices faced a different growth path. The costs to construct shops, office & industrial premises dipped after the global financial crisis in 2008 at a rate that had not been experienced after 1980. This was only a shallow decline which flattened out until 2013, before the sector took off again.”

Mr Dibble said some of this construction cost growth related to pressure from the Christchurch earthquake rebuild, but said: “It highlights just how little capacity we have in New Zealand to rectify major imbalances between demand & supply, especially in a low overall inflation rate environment.”

The second chart, of the annual percentage change in the index by sector, shows the residential sector had 2 key periods of growth that were out of step with the commercial sector, in 1994 & 2008-09.

constr cost sector1609“In 1994, the construction cost growth rate/year for commercial property was about half of the residential sector. This coincides with a 45% rise in real house prices in Auckland between mid-1992 & late 1995, according to the Reserve Bank.”

The other pivotal time was after the global financial crisis: “Residential construction cost changes flat-lined, but didn’t reach negative territory like its commercial counterpart. Similarly, house prices also remained relatively flat.

“The current annual growth rates in construction costs in the residential sector reached 6% in the year to June 2016, above the 36-year average of 5%/year. Current trends indicate that this rate of construction cost growth may have slowed, potentially correlating with a recent slowdown in house price appreciation in Auckland since the latest measures of loan:value ratio restrictions implemented by the Reserve Bank.

“The commercial sector has already experienced a slight slowdown in construction cost price rises. While still in growth mode, at about 3%/year, this is below the 36-year average of 4%/year.”

Mr Dibble said the outlook for non-residential construction costs was for a slight dip over the short term, just below the long-term average. The latest forecasts from the NZ Institute of Economic Research showed non-residential construction cost inflation between 2016-19 at 3.2-4.1%/year – the highest sustained inflation in the sector since the construction boom of the mid-2000s.

The institute didn’t expect the inflation to be as high as in the mid-2000s because of 2 factors: the low inflation environment would limit the extent to which rising costs could be passed on, and strong net migration was helping to mitigate skills shortages in the building sector.

However, Mr Dibble concluded: “Costs rising by this rate year-on-year will ultimately lead to unavoidable cost rises in rents & prices for both residential & commercial property.”

New development phase

He said the Auckland office sector was entering a new phase of the development cycle, with activity the highest in almost a decade “This should alleviate some of the pent-up tenant demand in an undersupplied market. The Auckland cbd vacancy rate, at 5.5%, is at an all-time low, while the metropolitan rate of 6.2% is at an 8-year low.

Mr Dibble said 103,313m² was under construction in the cbd and 84,353m² was on hold. In the rest of the metropolitan area, 66,341m² was under construction and 30,000m² on hold until new anchor tenants can be secured.

Attribution: Agency research.

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Professor questions value of tendering for sake of transparency

An Australian academic report says taxpayers are ultimately footing the bill for tens of millions of dollars/year on tendering processes that don’t represent value for their money.

In a commentary titled To tender or not: how transparent is the process? Sydney University Business School professor David Hensher says renewing a contract via tender – rather than strict performance-benchmarked negotiation with an incumbent company that has already satisfied all the required key performance indicators – is adding noticeable transaction & transition costs.

“There is a sense in many government circles that society is better off if service contracts are put to competitive tender. But what if the incumbent is doing a great job? Why should we disrupt (or risk) the continuity of good service because of some simplistic view that the market will always deliver the best outcome?”

Professor Hensher, who is director of the business school’s Institute for Transport & Logistics Studies, said the tendering process for bus services in Adelaide was an example of where taxpayers’ funds had been wasted in recent tendering rounds.

He said more than $A12 million was spent over a 5-year period on the tendering process related to contracts worth $A750 million: “These costs, $A5 million for government and $A7 million for operators, was money that might be better spent on improving services.

“The additional costs above the bid offer price associated with awarding a new entrant a contract through a tendering process rather than an efficient incumbent, adds measurably to the risk of service disruption and could result in extra costs of as much as 10% to the cost of a contract price.

“We suspect the tender assessment committees know this but ignore it. If transparency is the basis of justifying a course of assessment action, then ignoring this important matter is effectively covering up a real cost, and it violates the notion of transparent government.”

Link: To tender or not: how transparent is the process?

Attribution: University release.

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Plasterboard inquiry reveals no anti-competitive behaviour by Winstone

The Commerce Commission said today it had completed its investigation into allegations that Fletcher Building Ltd subsidiary Winstone Wallboards Ltd acted anti-competitively to maintain its market position in the manufacture & supply of plasterboard.

Commission chairman Mark Berry said: “Based on the evidence gathered during the investigation, the commission does not believe Winstone has breached the Commerce Act 1986 and it will not be taking any further action.”

The commission’s investigation was centred on 3 areas – Winstone’s alleged exclusive agreements with merchants, the rebates Winstone pays to merchants and Winstone’s alleged practice of undercutting other plasterboard suppliers on jobs.

Dr Berry commented: “We have completed a thorough investigation and there is no evidence to suggest that Winstone has breached the Commerce Act in any of these areas.

“Winstone’s supply contracts with merchants (excluding Placemakers, which is also a subsidiary of Fletcher Building) do not contain contractual provisions that require the merchants to purchase all their plasterboard from Winstone. Nor do we believe that the rebates Winstone pays to merchants result in merchants purchasing nearly all of their plasterboard from Winstone.

“The evidence suggests the loyalty shown to Winstone and its large market share is likely a result of a number of other factors – its level of service (in particular, technical product information & delivery support), the quality of GIB products, comparative prices, regulatory barriers to entry to the market and, until recently, import duties on plasterboard.

“If Winstone were to stop using rebates tomorrow, we would not expect to see any greater competitiveness of the market.

“This investigation was complex and, as a result, lengthy. An initial investigation was completed in April this year. However, additional information was provided by complainants, which led us to undertake an additional round of interviews & further investigation.
“While plasterboard only accounts for between 1-3% of the cost of building a new home in New Zealand (excluding land), the construction industry is a very important part of the New Zealand economy. As such, we needed to ensure we took the time to complete a very thorough investigation.”

New Zealand’s longstanding anti-dumping duties on imported plasterboard were removed in June.

Link: Investigation report

Attribution: Commission release.

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Government releases options paper on building materials costs

The Government has followed up its May issues paper on the residential construction sector with an options paper proposing increased transparency, simplified compliance, changes to anti-dumping duties and tariff concessions to bring down the cost of home building materials.

Housing Minister Nick Smith & Commerce Minister Craig Foss released the Ministry of Business, Innovation & Employment’s options paper yesterday.

Dr Smith said: “Building materials costs are too high and can be as much as 30% more in New Zealand than in Australia, according to the Productivity Commission. The industry needs a shake-up through increased competition & greater transparency to ensure Kiwi families can get access to more fairly priced building materials & homes.

“Our market study has flushed out some very real issues in the building materials industry. I worry that high duties on some imported building products, combined with limited competition in New Zealand, are allowing excessive margins by building product manufacturers. I also have concerns over a lack of transparency for consumers over what benefits builders are getting from using certain products.

“Bringing down the cost of building materials is an important component of the Government’s major work programme to improve housing affordability. We are taking action on a range of fronts, including freeing up land supply, reforming the Resource Management Act, reining in council development charges, keeping interest rates lower for longer, investing in skills & productivity and supporting first-homebuyers through changes to Welcome home loans & the KiwiSaver first home deposit subsidy.”

Commerce Minister Craig Foss said: “This paper identifies a range of barriers that could impact competition & productivity in the residential construction sector. The barriers appear to lead to a bias towards the continued use of ‘tried & true’ brands, products, methods & systems. This impedes the ability of new firms to enter the market and of existing firms to innovate.

“We strongly encourage feedback on the practicality & likely benefits of all of the options presented in this paper, before we make our final decisions.”

Submissions on the options paper close on Wednesday 18 December.

Links: Options paper
Market study

Attribution: Ministerial release, ministry.

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Rider forecasts tender index rises for 2013

Published 23 November 2012

Rider Levett Bucknall forecast yesterday that its tender price index for Auckland would rise 3% next year.

Rider Levett Bucknall Auckland Ltd director Richard Anderson said the index hadn’t moved at all this year, although underlying labour & material costs continued to rise.

“Non-residential building activity remains subdued, with consent values down 10% over the past year.  Activity in the key sectors of retail, commercial & industrial construction appears to have stabilised and the risk of further falls in these sectors has reduced. However, given the fall in building consent values overall, building activity in the medium term will continue to be low.

“With reducing public spend and the difficulties in private sector investment conditions, there is a real lack of significant projects on the horizon in Auckland and little suggests any real improvement in the short to mid-term.”

Mr Anderson said the tender market in Auckland was still fiercely competitive:  “Aided by a high $NZ, there is little upwards pressure on costs, with the restrained work supply margins remaining extremely low.  There have been no increases on tender pricing during 2012 and no impacts on costs stemming from the Canterbury earthquake rebuild, which is yet to gain any momentum.”

In Christchurch, Rider Levett Bucknall expected its index to be up 4.7% this year and to grow by 5% next year. Christchurch director Neil O’Donnell said: “Whilst there is progress in the residential repair programme, full rebuilds are still moving along slowly. Certain trades continue to show tender price increases, although the industry is still awaiting the reconstruction to gather the fully expected momentum.”

In Wellington, despite favourable conditions for buyers, activity remained subdued.  Rider Levett Bucknall expected tender costs to be up 1.5% this year and to grow by 5% next year.

Wellington director Grant Watkins said house prices were static, but a number of new apartment blocks had started or been confirmed recently. Non-residential construction remained very low, due in part to a reduction in government spending.

“The outlook for the Wellington region is one of slow decline. With few signs of improvement, the bottom of the trough still seems some way off. Further reductions in workforce numbers are being applied to government departments, both central & local, and are likely to feed through to the commercial, residential & retail markets in the near future.”

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Attribution: Company release, story written by Bob Dey for the Bob Dey Property Report.

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NZIER/Rider report forecasts construction costs pickup next year

Published 3 July 2009

NZIER (the NZ Institute of Economic Research) says in the latest Rider Levett Bucknall report it expects the rise in construction costs to continue easing until early 2010, as investment in non-residential buildings declines.

 

The report on property & construction trends predicts the recession is likely to linger through to the September quarter, before the economy resumes growing in the December quarter.

 

“The recovery will be assisted by rising immigration boosting the population, but the main factor will be the realisation of pent-up demand as the considerable stimulus to private consumption that has been building up in the economy at last gains traction.”

 

Hugh Mackenzie, managing director of Rider Levett Bucknall’s Wellington office, commented: “As we see economic growth commence to accelerate domestically and building investment starts growing again in residential & commercial property over 2010 & 2011, we forecast both quarterly & annual cost escalation across New Zealand.”

 

The forecast report indicates slightly higher cost escalation in the short run, but lower cost escalation in the longer run: “Current building consents data & building investment forecasts suggest a lower volume of non-residential building work over the next 2 years, but of higher average value. The earlier upturn in residential building investment will also start to put pressure on some building costs. Cost escalation will remain relatively low over the forecast period, as the economy faces a long, slow recovery.”

 

Average construction costs nationally are forecast to increase by 0.5% in 2009, increase by 1.3% in 2010, 1.6% in 2011 & 2.2% in 2012.

 

Mr Mackenzie said: “Whilst data within the forecast shows record annual levels of non-residential work put in place and building consent provides the industry with a glimmer of hope for on-the-ground activity to sustain New Zealand’s construction workforce, many are still nervous about the industry’s long-term prospects.  

“Historically, growth in residential building tends to move in time with, if not lead, economic growth, whilst growth in non-residential building significantly lags economic upturns & downturns.”

 

NZIER estimates the total value of non-residential building investment to have grown 3.1% over the year to March 2009, but expects it to fall 12.7% over the March 2010 year and 6.2% over the March 2011 year, before rebounding to 10.8% growth over the year to March 2012.

 

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Attribution: Rider Levett Bucknall report, story written by Bob Dey for the Bob Dey Property Report.

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Housing comparison figures wrong, council says point unchanged

Published 19 February 2007


Auckland City Council acknowledges its error in a trans-Tasman housing comparison, sticks by its point but isn’t about to launch into the deeper research which would show why it costs more to build in New Zealand.


The initial report to the council’s economic development & sustainable business committee put the extra cost at 85% for small houses, 91% for large. The figures have been corrected to 60% for small, 65% for large.


The call for a comparison began back in December 2005, when Cllr Richard Northey had a chat to Dennis Family Corp executive director Grant Dennis at a meeting of the Brisbane-Auckland Business Council. The company was a major housing construction & development business.


Mr Dennis told Cllr Northey housing construction costs in New Zealand were too high, largely because of the near-monopoly on key housing construction materials held by a small number of New Zealand companies.


The council’s economic development group said that, given its workload, a consultant would have to be contracted if the committee wanted more detailed analysis. The staff report recommended no further work on comparative building costs be undertaken at this stage.


However, the committee agreed to call on neighbouring councils, Local Government NZ & the Government to address construction costs, including a study on high housing costs and developing policies for ensuring affordable housing in metropolitan areas.


Earlier stories:


14 February 2007: Councillors will keep poking around after report says housing costs more here than in Australia


4 October 2006: Councillors launch attack on monopoly-based high building costs


 


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Attribution: Council committee agenda, subsequent release, story written by Bob Dey for this website.

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Councillors will keep poking around after report says housing costs more here than in Australia

Published 14 February 2007


An Auckland City Council report on the difference between house-building costs in Australia & New Zealand established that it costs an awful lot more here, but didn’t even start to go into the reasons.


The call for a comparison began back in December 2005, when Cllr Richard Northey had a chat to Dennis Family Corp executive director Grant Dennis at a meeting of the Brisbane-Auckland Business Council. The company was a major housing construction & development business.


Mr Dennis told Cllr Northey housing construction costs in New Zealand were too high, largely because of the near-monopoly on key housing construction materials held by a small number of New Zealand companies.


Cllr Northey reported the conversation to a council committee meeting last October, and Cllr Penny Sefuiva picked up on the issue. She said the Securities Commission should investigate construction costs.


The council’s urban strategy & governance committee asked for staff to report to the economic development & sustainable business committee, which happened on Monday.


The single finding, based on building costs in the Rawlinson construction handbooks for New Zealand & Australia, was that a small house in Auckland cost 85% more to build than the average cost across Australia’s east coast capital cities, and a big house cost 91% more.


Staff didn’t go beyond that cursory look. Economic analyst Kerry Craig said in the report:


“A comprehensive response to the committee’s request on building costs would require data on raw materials, labour & compliance costs in the building industry for New Zealand, Australia & other OECD countries. This information would need to cover residential & non-residential construction separately. Officers’ search for this information has shown that it is not readily available. We have been able to partially answer the question using what information is readily available.


“In addition, an answer to the question requires consideration of comparative environments that might explain differences in building costs. This would include looking at issues such as economic conditions, the policy environment & market structures prevailing in the building industry. We have not at this stage investigated these issues.”


The Rawlinson’s comparison was also not perfect “as the New Zealand & Australian handbooks each have a different definition for what materials are used and size for each class of building. In addition, there is no standard definition for a small or a large house, so officers have had to select the closest comparisons for the purpose of this exercise.


“International comparison of the compliance costs (these are the costs imposed by regulator authorities, eg, resource consent) associated with building is even more complex than measuring the cost of labour & construction materials. Statistics NZ does not attempt to quantify the costs for New Zealand. International comparison would require an assessment of New Zealand’s compliance costs and then an understanding of compliance costs in comparator countries.”


Based on the latest (June 2006) Department of Building & Housing information, building costs are between $1388-1601/m2  for residential construction in the Auckland region (including gst and comprising building materials, labour & contractor’s overhead, which also includes gst). The Rawlinson estimates were comparable but slightly higher. The Government publication doesn’t include any international comparison.


The council’s economic development group said that, given its workload, a consultant would have to be contracted if the committee wanted more detailed analysis. The staff report recommended no further work on comparative building costs be undertaken at this stage.


However, the committee wasn’t put off that easily and agreed to call on neighbouring councils, Local Government NZ & the Government to address construction costs, including a study on high housing costs and developing policies for ensuring affordable housing in metropolitan areas.


Cllr Northey will also ask the Commerce Commission to investigate monopolistic practices in building material supply.


Cllr Northey said councillors had been told it was cheaper to import & construct kitset homes from Queensland than to construct them from scratch in New Zealand: “These issues require further investigation, including the possibility that housing costs are impacted by effective near-monopolies on building materials and possible excessively high construction requirements, in part following the leaky buildings issue.


 “The argument that anti-sprawl urban development policies are pushing up land prices is countered by high property prices outside the urban limits.


“The proportion of families who are able to realise the classic New Zealand dream of home ownership is dropping dramatically. This is particularly so in Auckland, where nearly 40% of people live in rental accommodation. The average price of residential property has risen to about 6 times the average family income.


“Reserve Bank interest rate hikes are not taking the heat out of the housing market because of the almost guaranteed high capital gains.”


He said possible alternatives included:

a capital gains tax on all property, or investment property only
a ban on house sales to foreigners who live overseas and rarely visit here
Government controls on prices of building materials or greater competition
inclusionary zoning ensuring a minimum of affordable housing in all significant urban developments.

Earlier story:


4 October 2006: Councillors launch attack on monopoly-based high building costs


 


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Attribution: Council committee agenda, story written by Bob Dey for this website.

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Councillors launch attack on monopoly-based high building costs

Published 4 October 2006


Auckland City Council wants building costs investigated after allegations of monopoly abuse made to one of the councillors who went on fact-finding tours last summer.



Cllr Richard Northey raised the issue in a combined report on 2 Australian tours by 4 councillors – deputy mayor Bruce Hucker and Cllrs Richard Northey, Scott Milne & Vern Walsh.


But although the touring councillors made various recommendations, which the urban strategy & governance committee accepted on Monday, it was left to Cllr Penny Sefuiva to turn Cllr Northey’s comments into an investigation.


Cllr Northey said he met Dennis Family Corp executive director Grant Dennis at a meeting of the Brisbane-Auckland Business Council during the December 2005 visit. The company was a major housing construction & development business.


“Mr Dennis made the following points:

Housing construction costs in New Zealand were too high, largely because of the near-monopoly on key housing construction materials held by a small number of New Zealand companies

He was able to export houses in the form of prefabricated components from Brisbane that met New Zealand standards and construct them in New Zealand for considerably less than New Zealand prices, but had been frozen out by what he considered were restrictive trade practices.


New Zealand construction methods involving having a considerable variety of tradesmen & subcontractors also added considerably to prices & delays.

He had been involved in inclusionary zoning developments, involving a set proportion of affordable housing in a number of Australian cities and they had worked well from his point of view, with the affordable component melding well with the higher-value component

The Brisbane Housing Co, which is structured like a New Zealand council-controlled organisation, includes a minimum proportion of affordable housing in all its developments.”


While several of the touring councillors had focused on “affordable housing”, they weren’t able to answer a question from Cllr Christine Caughey on enablers for this to be done and another on a model for introducing such housing to Auckland.


And, from that, Cllr Sefuiva picked up on the issue of building costs. She said developers were only interested in immediate profit, not long-term gains. She was unable to ascertain from the touring councillors how housing, initially priced as affordable, was passed on so that status continued.


Cllr Sefuiva said housing construction costs were an issue the Securities Commission should investigate, rejected a claim from Cllr Doug Armstrong that the real issue was compliance costs and recommended that staff report to the council’s economic development & sustainable business committee “on the appropriate mechanism for raising the issue of building costs in New Zealand.”


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Attribution: Council agenda, debate, story written by Bob Dey for this website.

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