Why it’s more expensive to build in NZ than in Australia

by Rebecca Macfie / 07 July, 2012
John and Jane Creed

Why do Australians get 30% more new house for their money than we do?

John and Jane Creed are the very satisfied owners of a new four-bedroom brick home in the Mooloolah Valley, inland from Maroochydore on Queensland’s Sunshine Coast. The house is 302sq m and, in addition to the four bedrooms, it has an activity room and large office, both of which could be used as bedrooms. There’s an en suite and separate bathroom, a walkin dressing room in the master bedroom, mirrored wardrobe doors and a large tiled outdoor area. In the kitchen there’s a walk-in pantry, Caesarstone bench tops and a top-of-the-range cooker. There’s a reverse-cycle air-conditioning system throughout, and good quality fittings. It rests on 83 screw piles drilled up to 4m into the ground. Because it’s on a lifestyle block of 8000sq m, it also has its own sewerage and water system. All in all, says John Creed, “it’s a quite luxurious house”.

The couple lived in a caravan on the site while the house was being built, and observed that the project ran “like an army exercise”. From start to finish, it took 13 weeks. The only hold-ups occurred before construction started, when constant rain delayed the erection of a large A$55,000 (NZ$70,000) retaining wall on the sloping site. The house is a standard design offered by the group builder who constructed the home. “We went to all the show homes and we particularly liked this one. There were two or three roof sizes with this house, and as long as you stick to the roof size that they suggest, you can do anything inside that you want to, and that’s at no extra cost. But we particularly liked the show home so we just did everything exactly the same, even the colours and the tiles.”

The finished price (excluding the retaining wall) was just under A$284,000. Minus the cost of the on-site sewerage and water systems and A$4000 worth of fancy lighting that the Creeds chose as an “extra”, the price was A$255,000. John Creed’s son is enjoying a similarly cheerful experience having a house built in an upmarket housing estate not far away. The finished three-bedroom 197sq m home will cost A$147,000. They expect it to take nine or 10 weeks to complete.

Jay and Shane Clark moved in January into their new home in Rolleston, on the outskirts of Christchurch. They, too, are very proud of the finished product, which suits them and their seven- and two-year-old children. The builder, Benchmark Homes, is sufficiently pleased with it to have entered it into the home of the year competition. The Clarks selected the design after doing the rounds of the show homes. The house is 232sq m, with four bedrooms, walk-in wardrobe, two living areas, study, two bathrooms, internal laundry and walk-in pantry. It’s a well-built quality home, clad in Hebel, Titan board and Linea.

The building company originally said it would take 16 to 20 weeks to build, but unluckily for the Clarks the February 22 earthquake intervened, causing various delays and necessitating deeper and more expensive foundations. In the end, it took six months to build. The basic price of Benchmark’s show home design was $320,000, although the Clarks chose to pay more for higher-quality appliances, taps and lights, as well as a stone bench top, tiled flooring and a bigger garage. The finished price – not including an outdoor living area or driveway – was $360,000. That’s almost exactly the same as John and Jane Creed paid for their house in Queensland, which is nearly a third larger.

The Creeds and the Clarks are real-life case studies of a major transtasman gap – the cost of house construction. According to a report on housing affordability published by the Productivity Commission in March, it costs 15-25% more to build a house in New Zealand than in Australia. Analysis of the quantity surveyor’s bible, Rawlinsons (which publishes an annual guide to building costs on both sides of the Tasman), revealed the starkest disparity was between Auckland and Melbourne. The mid-range cost to build a home in Auckland was cited by Rawlinsons at $1650 per square metre last year; in Melbourne it was $1175. The report also cited the construction costs of a four-bedroom house built by the same building company in Rodney, Auckland, and in Geelong, Victoria. The Rodney house cost NZ$177,500 to build; the Geelong house was NZ$156,368.

The cost of building materials was also found to be far higher in New Zealand. A builder who operates in both markets supplied the commission with a set of costings for the same home in New Zealand and Australia: prices on the other side of the Tasman were three-quarters of New Zealand’s. Australian bricks, for instance, were 81% of the cost of New Zealand bricks; framing was just 14% of the New Zealand cost; and internal doors 74%. And no, the disparity in construction costs can’t be explained away by differences in the building codes between the two countries, say industry experts.

Although New Zealand homes have to be built to withstand earthquakes, and in recent years the code has required double glazing, Australian builders have to compensate for such hazards as termites and cyclones. Paul Shortis, general manager of science and engineering services with the building research agency Branz, says building code differences are “not a key driver” of the wide divergence in building costs. “It’s relatively neutral.”

Deep seated problems

The sector is New Zealand’s fifth largest, and accounts for 4% of the economy; how well (or otherwise) it does its job has a big impact on the cost of new homes and renovations. Given that housing is the single biggest expense for most people (whether we own or rent our homes), the competence of the industry has a direct effect on the well-being of householders and communities. As the commission points out, reducing the cost of construction could remove a major blockage in the housing market by increasing the ability of existing homeowners to move to a newly built home, thereby freeing up older homes for first-home buyers. And it could also bring a new generation of modest and affordable new homes onto the market for first-time buyers.

Given the massive volume of building work coming down the track as a result of the Christchurch rebuild, the repair of some 42,000 leaky homes, and the 11,000 new homes that Auckland will require to keep up with population growth, there’s an urgent need to lift the industry’s game. Following a major review of the building sector’s performance by a 2009 taskforce, the industry formed the Building and Construction Productivity Partnership with the aim of improving productivity by 20% by 2020. But there are no quick or easy fixes for this fragmented industry; instead, it’s a case of trying to do a whole lot of things better. Branz deputy chair Helen Anderson is leading one of the partnership’s workstreams, charged with pulling together evidence that will help improve the industry’s performance. She says the building sector is one of the most volatile in New Zealand, and is dominated by small operators. More than 90% of builders have fewer than five employees, and of those, 63% are one-man operators who build one house a year.

Because of its boom-and-bust nature, there’s a tendency for newcomers to enter the industry in good times and leave in the bad, leading to problems with skill levels in the sector. According to a 2006 survey, 69% of building jobs had a defect at the time of handover to the client. Chris Kane, secretariat manager of the Productivity Partnership, points to the industry’s low barriers to entry and minimal capital requirements. “You can become a professional builder with your piece of paper saying you have passed your qualifications. All you need to do is invest in a ute, a dog, some tools and you’re away. They don’t necessarily have the ability to use some of the more sophisticated management tools to the fullest extent that they could… Often they don’t have the time [to lift management skills], and also quite often they have come into the industry because it’s a lifestyle choice.”

A major thrust of the Productivity Partnership’s work is improving the procurement skills of these small operators. It sounds as dull as dishwater, but as procurement expert Richard May points out, it’s fundamental to improving the efficiency of the industry. May says given that most builders are effectively just selling their labour and buying in everything else – from timber and nails to consents and design advice – the proficiency of their purchasing decisions can make a big difference to the cost of housing. “But the whole industry in New Zealand is set up around persuading people that the place to buy is the Placemakers or the Bunnings or the Mitre 10s. It’s a very distorted supply market, so you have Placemakers [owned by Fletcher Building], saying ‘we get all our supply from Fletchers’, whether it’s concrete through Firth or whatever. So the margins are largely hidden. And the way they manage the builders is they say, ‘you buy more from us and we will give you a rebate’.”

Although there is competition in the building-materials market, big suppliers such as Placemakers are able to “play” the small-scale builder well, May says. Meaning? “Through loyalties. And in small towns it’s through personalities, it’s: ‘He’s my mate.’ It’s: ‘Gee, I can’t pay you this week’ and ‘That’s okay, we’ll let you pay it off.’ There are lots of commercial ways that work subtly.

“So you always go to Placemakers because a) they always look after me, b) I know the guy down there, and c) I also go to the local drinking spot with them. So there’s not really a competitive nature there. You only move when you are dissatisfied.” And the homeowner, on whose behalf the materials are being bought, often has no real idea of the true cost, so there are weak incentives for the builder to look for sharper deals elsewhere.

Better procurement is also about improved project flow and eliminating the downtime that occurs because a critical inspection hasn’t been done, or the concrete truck hasn’t arrived, or a set of windows hasn’t been measured accurately and has to be sent back. May is working with the industry to develop an online tool, accessible from a smartphone or tablet, that will enable smallscale builders to improve their procurement strategies and project management. “We’re great at picking up the hammer first, rather than the hammer being in the back pocket and using more coherent management tools and thinking in the first place.” He also sees the potential for small operators to club together to gain some of the buying clout that larger group-home builders have. “One builder and his ute by himself is a very lonely figure, and the Placemakers of the world are very large. So they are much better off if they can work in a federation or group and share with like-minded people in the same area.”

Customisation the norm

Paul Shortis at Branz says New Zealanders are also paying the price for the high level of customisation of our homes. In contrast to Perth, where 60% of all new homes are erected by three large companies building standard off-the-shelf designs, most new homes in New Zealand are unique. “Basically the New Zealand model is that you go to a builder – either a group builder or an individual small builder – and you start talking about customising plans. And you end up with this aggregation of minor changes that just continues to add to the cost. If you go to a really smart group builder, their designs will often revolve around not cutting the standard length of a wallboard sheet, so they have designed specific dimensions between door openings and apertures. They have it down to a fine art. But the minute you say, ‘I don’t like that door there’ or ‘I want a double door’, you start adding cost. “In Australia, the choice is what colour walls do you want, or what kind of bench tiles, but you don’t play with the fundamental design.”

Although some New Zealand group builders have started to spell out to customers the cost of changes to the standard design, Shortis says it’s not easy to go against the norm. “In a market that is offering customisation as the standard, who will break ranks first?” Another factor in the high price of new houses is that the market is dominated by households moving onto their third, fourth or fifth homes, who have accumulated some equity and know what they want. In contrast to the 1960s, when most new houses were in the bottom price brackets, the majority of new homes today are upmarket affairs.

The average new house size has been rising steadily since the 1950s, from around 110sq m to 200sq m today. Minimum expectations these days are four bedrooms, a TV room, en suite and attached garage. That trend has been reinforced by developers of new subdivisions imposing covenants setting out minimum house sizes and standards in order to protect the value of the surrounding properties. Research by Branz economist Ian Page also shows that when a homeowner involves an architect in the design of a new home, it adds 8-15% to the cost. Shortis says in Australia, thanks in part to government incentives, the market is going in the opposite direction, with a fl ow of modest new starter homes coming on stream. He says on a recent trip to Canberra he spoke to a developer building 180 homes of 120-130sq m on the outskirts of the city, targeting fi rst-home buyers – a phenomenon virtually unheard of in New Zealand these days.

Streamlining

Brent Mettrick, founding director of Stonewood Homes, is a member of the Productivity Partnership’s governing board, and has embraced the need to streamline the industry by moving to greater standardisation and tighter procurement practices. For instance, he has asked his window manufacturer to limit the range of colours on offer, and standardise window sizes for bedrooms, toilets and bathrooms. That should lead to lower holding costs for the manufacturer, and fewer delays in Mettrick’s supply chain. He thinks a move to greater standardisation of building components could also lower transport costs by increasing the number of full containers moved around the country.

Through tighter scheduling, he has pulled back his average build time from 21 weeks to 12, which improves cashflow, reduces downtime for subcontractors and reduces the amount of rent homeowners have to pay while waiting for their new house. He’s also on a mission to reduce waste through better planning, increased recycling and getting rid of unnecessary packaging. As a result he has reduced the volume of rubbish at the end of a job from four skips to one. It sounds like trivia, but Mettrick says improved performance will come about from “a lot of small things, not one big gain”.

But he admits these efficiency gains won’t filter through to lower prices for home buyers until the firm is operating at larger scale and the benefits of greater standardisation filter back up the supply chain. “We are a company that has traditionally done 200 houses a year. The next step is to do 400 houses in Christchurch. That allows me to halve my overhead per house. And with 400 homes in standardised format it allows our supply chain to standardise their purchasing.”

But although the likes of May and Mettrick argue there are substantial gains to be made by lifting the procurement and project-management skills of the building industry, others say the underlying problem is a lack of scale, and that won’t be solved until there is a better supply of land for residential construction. Michael Fox, chairman of the Master Builders Federation, says a chicken-and-egg problem lies at the heart of New Zealand’s high building costs. He argues the industry has adapted to an environment of high land prices caused by restrictive zoning and subdivision rules in which high-end bespoke homes are the norm. “If there was more land available, I think you would find the industry would develop where you’d be building hundreds of houses at a time, there would be economies of scale, there would be more standardisation and costs would come down because there would now be a market for starter homes.”

Fox adheres to the widely held view that policies designed to stop urban sprawl – Auckland’s Metropolitan Urban Limit in particular – have created a scarcity of land and inflated section prices. According to the Productivity Commission, the average price of residential land in Auckland is almost double that of the rest of New Zealand – although rising section prices throughout the country have been a key driver of rising house prices. And people who buy an expensive piece of land tend to put an expensive upmarket house on it, in order to maximise their return on investment. The commission has recommended a move away from highly constrained urban limits, arguing the single biggest factor preventing the emergence of large-scale group builders is a shortage of large land parcels that would enable the roll-out of affordable home developments.

Maverick Tauranga property developer and former National Party MP Bob Clarkson also believes the high price of land is at the root of the home-affordability issue. He says property owners on city fringes are “sitting like wolves” until their land is rezoned residential, at which point their values soar and they reap windfall profits of as much as $50,000 a section, which goes straight onto the cost of housing. He is trying to convince Tauranga local authorities to move to a system where the owners of suitable land on the city fringe would be asked to tender for the right to develop subdivisions that cater to the affordable end of the market. The best proposals would be rezoned first.

In the case of a 210ha block at Tauriko (currently zoned rural) that he owns, he is offering to sacrifice the potential windfall profit if the land is zoned residential, and build 1000 modest homes. The price of the 400sq m section and three-bedroom house packages would be $280,000. The development would also include 1000 more upmarket houses. Clarkson says he would be able to build homes that were within the reach of lowincome families because of the scale of the development. Through bulk buying he says he could knock 40% off the price of materials. And by offering only standard designs and building 100 homes at a time, work-teams would become highly efficient. Home-buyers wouldn’t be able to customise the design at all: “The choice would be, do you want it or don’t you?”

But under the current system, Clarkson says it could take two-and-a-half years and $2.5 million to have the land rezoned. “I’m 73 years old and I anticipate by the time the first homes are built it will be four or five years. I’ll be getting a bit old and grumpy by then, I’d imagine.”

The renovators

$100,000 goes on painting, floor-sanding and other mostly non-structural work.

New Zealand’s high cost of building affects not only the price of new houses, but renovations, too. Around 32,000 homes are renovated each year. Adam and Fiona Barker bought their Mt Albert “do-up” recently for a $1 million-plus price tag, with the intention of restoring it to its former glory. Adam says the old villa “hasn’t had a lot of love” over the past 20 or 30 years, but it has “good bones”, including matai flooring and lovely plaster ceilings. As the couple – both aged 39 – and their three young children intend to stay put for many years, they’re convinced the renovation effort will be worthwhile.

“We’ve borrowed all that Kiwibank would give us to buy the house in the first place, so we haven’t got a huge amount of money to spend, and we are really trying to focus on what we need to do to make the house liveable at this stage,” says Adam Barker. They’ve largely spent the $100,000 they budgeted for the first round of improvements. It’s gone on interior painting (including numerous timber window frames), replacing lighting and curtains, fixing a leaking window and moving a door, polishing floorboards and re-carpeting part of the house, installing network cabling and replacing a small amount of electrical wiring, underfloor insulation and replacing four door locks. They hope there will be enough left in the kitty to do a bathroom.

“In the fullness of time we will end up knocking down the wall between two living areas and extending a deck and changing the kitchen, but that won’t be any time soon.” Barker says they haven’t been deterred by the cost of the work done so far. “We went into it knowing it would be expensive… It’s just a lot of people’s time to make an old house that was in fairly tired condition look good.” They’ve taken the approach that they will work on the house at a pace that their budget allows. “We hope that in 10 years’ time we will be able to say, ‘Look, we’ve done it well and now we can enjoy it.’ I guess this house is one that we imagine we will be in for 20 years.”

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