The seven big threats to KiwiBuild

by Nikki Mandow / 22 May, 2018
Photo/Getty images/Listener illustration

Photo/Getty images/Listener illustration

RelatedArticlesModule - KiwiBuild

The Government’s $2 billion KiwiBuild scheme aims to provide 100,000 homes over the next decade. But can it deliver? Some in the construction sector regard the target as hopelessly over-ambitious. 

Once upon a time, in a land not far away, there lived a happy young couple. They had good jobs and a beautiful baby, and they had bought a little house. After paying the mortgage each month, they still had enough money to bring up their growing family.

When the baby grew up, she wanted to buy a house, too, but there weren’t many to buy, and they were far too expensive for her. Most of her friends were in the same situation; some didn’t have a house to live in at all, so they had to go and live in caves in the woods. Everyone was very worried.

Then, one day, there was a new queen of this not-so-far-away land. She called together her wisest advisers, who came up with a plan (called KiwiBuild) to spend $2 billion of the country’s money to build 100,000 “affordable” homes over 10 years. (The word “affordable” didn’t really mean they would be affordable, but just less unaffordable than the 60,000 other homes that also needed to be built.)

Other people in the land – let’s call it New Zealand – are worried. Experts in the construction and related sectors wonder if the existing problems aren’t too hard for a short- or medium-term fix, and whether the queen (let’s call her Jacinda Ardern) and her two loyal advisers (Housing and Urban Development Minister Phil Twyford and Building and Construction Minister Jenny Salesa) can really hit the target of 100,000 warm, dry, affordable houses in that time.

In the best fairy tales, the hero must pass a series of challenges – usually to win the fair princess rather than improve housing affordability. But in the same spirit, here are seven major tests the country’s leaders must overcome if we are to have any chance of beating the housing crisis.

Leonie Freeman.

Test 1: Leadership vacuum

Leonie Freeman, who calls herself a housing strategist, knows a lot about property. She’s worked in the private and public sector, including at Goodman Property Trust, Housing NZ and Auckland Council. The sole purpose of what she calls her “philanthropic and independent initiative”, thehomepage.nz, is to bring people together to solve Auckland’s housing crisis. She believes the main challenge for KiwiBuild is uniting the different organisations involved – central and local government, construction companies, building-supply firms, community-housing groups, regulators, banks, architects and designers – many of them acting in silos, controlled by hierarchies or influenced by commercial or political rivalries.

These organisations are writing reports – at last count, there were 35 for Auckland – that are long on defining the problem and short on how to solve it.

“We have to focus on delivery, and we just don’t,” says Freeman. “The mayoral task force came up with 33 good recommendations in its June 2017 report. But then nothing happened. We need someone to take leadership.”

Auckland Mayor Phil Goff says a report on progress will be delivered “later this year”. But the Government’s plans are still being formed. A draft KiwiBuild delivery document seen by the Listener shows a pipeline of objectives until the end of this year, but after December the spreadsheet contains almost nothing. There are no objectives for 2019 and only three vague bullet points for 2020 onwards.

Twyford agrees with Freeman that there is a lack of leadership and is putting his hand up. “It’s only central government that has the democratic mandate and resources to take that leadership role. We are bringing all the functions together and I’m trying to get Government to engage much more seriously with all the parts of the housing system.”

Grant Millar of Precision Construction says he could expand by 50% if he could get builders. Photo/Simon Young

Grant Millar of Precision Construction says he could expand by 50% if he could get builders. Photo/Simon Young

Test 2: Skills shortage

James Delaney, the co-owner of Auckland-based Chain Construction, knows first-hand the extent of the skills shortage. The eight-person company wants four more experienced carpenters just to keep up with the jobs already on its books.

“I don’t know where these people are going to come from [to build an additional 100,000 KiwiBuild homes],” Delaney says.

It’s the same issue for builder Grant Millar, managing director of Precision Construction. Millar employs 100 people and says there’s enough work out there for his firm to expand to 150 if a fairy godmother could wave a wand and produce good candidates.

A Statistics New Zealand survey published in 2017 showed that almost 80% of construction firms had looked for staff in the previous 12 months. Nearly 60% of companies said they had hard-to-fill vacancies. The latest Ministry of Business, Innovation and Employment (MBIE) model shows a 30,000-person shortfall in the building trade right now; Registered Master Builders chief executive David Kelly reckons there could be more than 50,000 vacancies by 2020 as KiwiBuild ramps up.

The Government has less than three years to sort the problem out. The KiwiBuild masterplan envisages building only 1000 new affordable houses over the next 12 months, but the target is 5000 in the 2019-2020 year and 10,000-12,000 a year after that.

And it’s not as if young people are queueing up to join the industry. Studies show the fastest-growing demographic for construction workers is 60-plus; the fastest-shrinking is the under-30s. Give your average 18-year-old two options: tough work on a wet and cold (or blazing hot) building site, where the normal starting time is dawn, or something else. Too many are choosing something else.

Mark Farmer, a leading adviser to the UK Government on building and housing, delivered a stark warning when he visited New Zealand in March: KiwiBuild is doomed to fail unless the construction sector can find a way of solving the skills shortage.

Ardern and her team have some ideas. Under a proposed KiwiBuild visa scheme, residential construction firms would be able to hire skilled staff from overseas on a three-year work visa as long as they take on an apprentice for each foreign worker they hire – though it remains to be seen how many skilled migrant workers will want to take up the chance. Meanwhile, Jenny Salesa says she is chairing a group of eight ministers working on the problem.

Mark Farmer.

Test  3: Land and infrastructure

Nothing raises hackles like a discussion about the “green belt” – land around a major city that is zoned as not for development.

Twyford believes the green belt around Auckland, where it’s called the rural urban boundary (RUB), must be scrapped if New Zealand is to achieve its housing targets. His view is backed by research, including that of the Productivity Commission and the public-policy think tank the New Zealand Initiative, which argues zoning restrictions distort normal supply-and-demand market signals. In an open market, when land and housing prices start going up, landowners take the chance to sell their properties for development and prices go down again. In a restricted market, there isn’t enough land available, so prices just carry on going up. Owners of available land within the RUB zone hold on to it, banking on an even higher price in the future. The outcome is undeveloped land within the urban boundary, land shortages and more expensive housing.

On the other side of the debate are the anti-sprawl lobbyists, such as The Opportunities Party founder Gareth Morgan and the group Greater Auckland (formerly TransportBlog). They say there’s enough unused land inside the RUB; it just needs to be made available for development. Building outside the city boundaries, they argue, takes away productive farmland, forces more commuters into ever-longer car trips and is bad for the environment.

Twyford says we have to go both up and out. He wants dense developments in the central city – the 3000-4000 dwellings on the Unitec site in Mt Albert are the first example. And the RUB must go. There will be protection for sensitive areas, but the only way to bring prices down is to make much more land available for developers, he says.

It won’t be an easy fight. Homeowners hate planning changes that might affect house values, and Twyford still has to get the councils on board. As the Productivity Commission pointed out in its report, “homeowners have an incentive to oppose developments that could … affect the amenity and value of their homes and … involve new infrastructure spending and higher rates”: in other words, local planning rules give a lot of political power to nimbyism.

Just as crucial as freeing up land is working out how to pay for the billions of dollars’ worth of infrastructure to service new houses around the Auckland fringe: roads, water, sewerage, electricity, internet, parks – maybe even libraries and swimming pools.

“[Dealing with the] lack of financing for infrastructure is one of our top priorities,” Twyford says. “Many developers don’t have access to the capital needed to invest in infrastructure, and councils in high-growth areas such as Auckland are up against debt ceilings. Meanwhile, the Government doesn’t want to write more cheques to support infrastructure.”

Twyford is looking at the option of issuing 50-year infrastructure bonds, with the money raised made available to developers to build infrastructure for new housing subdivisions. The bond debt could be paid back from a targeted rate on the new houses, he says. He reckons councils will support the scheme – most will be relieved to have the burden of financing infrastructure off their shoulders.

When might this start? Hopefully next year, though Twyford admits that may be optimistic.

An EasyBuild home.

An EasyBuild home.

Test 4: Building costs

To build cheap housing, you have to keep construction costs down. And that’s just not happening. It costs 15-25% more to build a house in New Zealand than Australia, according to the most recent figures from the Productivity Commission. And prices just keep going up.

A registered Master Builders regional service manager, Faalepo Taei, estimates residential construction costs are increasing by 10% a year, at a time when inflation barely squeaks above 1%. So what’s going on?

Hamish McArthur runs Silverdale-based The House Company, which builds about 25 houses a year, employs 13 people and has up to 10 building gangs working on contract at any one time. He says many factors are pushing costs up. The skills shortages mean he has to pay more for subcontractors – blocklayers, for example, are charging twice what they did four years ago. And there’s no negotiation. You take the price on offer or the subbie takes another job.

It’s not just smaller companies affected. Cost overruns at Fletcher Building punched a billion-dollar hole in its earnings.

Then there’s the cost of materials, which the Productivity Commission (in the latest report in 2012) found was 76% higher here than in Australia.

McArthur says he is paying more for engineering work, warranties, health and safety equipment and compliance, insurance, building consents, legal fees and infrastructure costs.

“Overheads are much higher because of all the cost of extra administration. In the past, our supervisors could run seven jobs each. Now they are running five.”

Sections that might have cost $250,000 five years ago now cost more than $500,000, McArthur says. Everything adds to the cost of a job – and that is passed on to house buyers.

Hamish McArthur of Silverdale’s The House Company: skills shortages are pushing costs up.

Hamish McArthur of Silverdale’s The House Company: skills shortages are pushing costs up.

Test 5: Boosting productivity

UK building consultant Farmer doesn’t mince words when it comes to construction productivity: modernise or die.

The industry, he says, must address chronic low productivity before house prices will come down. It comes down to simple economics. Under normal models, the more of something you produce, the cheaper it becomes. To make one widget costs $1, but to make 100 widgets might cost only $75.

But most houses are one-off projects, built by the classic “bloke with a dog and a ute” building contractor, who may put up only a handful of houses a year. There are no economies of scale, so each additional house built that way exacerbates the shortage of labour and materials, pushing prices up in a vicious circle of increasing unaffordability.

Farmer’s solution to the affordability conundrum involves avoiding the bespoke houses New Zealanders expect in favour of prefabricated homes delivered on a large scale. Traditionally, about 40% of any house is pre-made – windows, doors, cladding. Take that to 60% or even 80% and “pre-manufactured value” starts delivering big efficiencies, Farmer says.

Since it doesn’t rain in a factory, working on prefab housing is more attractive to skilled workers, and less-skilled workers can be trained more quickly to assemble homes on-site.

Pamela Bell, chief executive of industry organisation PrefabNZ, has been telling that story for years, fighting the perception of prefabricated houses as low-quality, identical square boxes. Factory manufacturing – of panels, pods or complete buildings – allows for consistently higher quality than on-site building. It’s also quicker. A report released by PrefabNZ in March, Capacity & Capability, says offsite manufacturing companies have the capability to deliver about 7000 more homes a year from 2020 – 70% of the KiwiBuild target. The report says up to 80% of KiwiBuild homes could be put together offsite and that three big companies are gearing up to manufacture up to 6500 complete buildings a year.

Housing New Zealand is already piloting prefabricated construction for apartment developments, and Government papers seen by the Listener suggest the New Zealand Superannuation Fund is considering investment in a central North Island prefab plant.

Just this week, Westpac announced a pilot programme to make it easier for builders of prefab houses to get finance. If a trial construction of six such homes in Auckland and Waikato is successful, it will be rolled out nationwide. Meanwhile, timber processing firm Red Stag announced in March it was investing $20 million to increase production of cross-laminated timber, an eco-friendly and cost-effective material for prefabrication.

“We know it’s a boom-bust sector,” Salesa says, “but one of the opportunities for the Government is to come through with a pipeline of work driven by KiwiBuild to ease that boom-bust.”

It’s an easy win for the Government. If you need proof of enthusiasm, note that flat-pack home provider EasyBuild persuaded both Twyford and Salesa to attend the opening of its show-home village in Masterton in March.

Apartments at The Grounds at Hobsonville Point include prefabricated elements. Inset, Pamela Bell, CEO of PrefabNZ.

Apartments at The Grounds at Hobsonville Point include prefabricated elements. Inset, Pamela Bell, CEO of PrefabNZ.

Test 6: Finance

The Government estimates $5.4 billion will be spent on residential construction over the next four financial years, largely as a consequence of KiwiBuild: that’s half a billion Big Mac combos and a third of last year’s health budget.

Some of that sum will come from the public purse – Twyford has attached $2 billion to his KiwiBuild plans over 10 years. This includes a scheme launched this month under which the Government will buy affordable properties off the plans, thereby increasing up-front capital for large-scale developers – and hopefully speeding up the rate of construction. Once homes are built, the Government hopes to recycle the funds by selling them to the occupants. But government funding is still hamstrung by Labour’s debt limit, which prevents us from simply borrowing the money we need. Developers and aspiring homeowners will need to come up with most of the money.

Banks will provide some of it, but in recent months, they’ve tightened their lending criteria, so there will need to be some major investors chipping in – particularly for big, multi-dwelling housing projects.

Construction industry experts say there isn’t enough money in New Zealand to fund the development we need and we’ll have to call on overseas funds. But there’s a problem with that, too. As it stands, the recently drafted Overseas Investment Amendment Bill (OIAB), more commonly known as the crackdown on foreigners buying property, puts major hurdles in the way of the investment of overseas capital in residential construction. Developers who appeared before the select committee hearings on the legislation argued we don’t have enough investment capital here to finance large-scale house-building, so we shouldn’t be stopping foreign funds and large overseas investors.

Alastair Porter, a 50-year veteran of the land and property development sector, was one of more than 200 who made a submission on the OIAB to the select committee hearings. “What they are suggesting sounds like a good idea,” he says. “If you stop selling houses overseas, somehow there will be more for New Zealanders. But actually it will have the reverse effect: it will aggravate the shortage of affordable housing.”

Twyford says he’s listening and he expects to see significant changes in the next iteration of the bill.

Another major KiwiBuild funding initiative being investigated is a “shared equity” model: outside funders take a stake in a house to bridge the gap between what an individual buyer can afford and the purchase price. That’s going to be necessary because many households will struggle to find the deposit for a $600,000 “affordable” KiwiBuild home.

Twyford is talking to several of the country’s largest trading banks, including BNZ and Westpac, about the concept. There are few details, but it may be that the scheme will be backed by a government guarantee.

Jenny Salesa at the opening of EasyBuild’s show-home village.

Jenny Salesa at the opening of EasyBuild’s show-home village.

Test 7: Consent

In the same way that the rest of us complain about taxes, builders complain about consenting (they probably complain about taxes, too). Salesa hears it all the time, from councils, developers and people on the ground. “Consenting needs to be more efficient. At the moment it’s complex and it takes too long: the average is 220 working days. We are told by building owners that for every week a building is delayed, it costs the owners $1000-$1600.”

Salesa says MBIE is working on streamlining consenting and Auckland Council has agreed to pilot any changes. She’d like to see consenting times reduced to 20 working days.

Meanwhile, the ministry has already introduced what it is calling MultiProof approvals – a streamlined process for developers building several similar properties.

A fairy-tale ending?

It will be a formidable challenge for the Government to meet KiwiBuild targets: 1000 homes this year, 5000 next, 10,000 in 2020 and 2021, and 12,000 a year until 2028. The obstacles appear insurmountable, and the Government’s own figures show a 15,000-home shortfall over the next four years between projects so far in the pipeline and the KiwiBuild goal.

Only 18 KiwiBuild homes are under construction, but Twyford still believes the target is achievable. After entering Parliament in 2008, he had almost a decade in Opposition to hone policies that may just solve the housing crisis. And now he has the opportunity to put them into practice.

His new ministerial role brings together responsibility for housing and infrastructure, and observers believe that may just give him the power to bring disparate parts of the solution together.

The sheer scale of the problem may overwhelm him. If it doesn’t, Twyford may yet be able to bring a Disney-style ending to a Grimm fairy tale.

This article was first published in the May 19, 2018 issue of the New Zealand Listener.

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