Economist’s gloomy forecast for small building firms
"We think that, over time, the industry will morph into something more like that of Australia's." Westpac economist Paul Clark
A future where large construction companies dominate the home building landscape and smaller ones are left competing for alterations work has been forecast by Westpac economist Paul Clark.
Clark said the boom-bust cycle of New Zealand’s construction industry led to an influx of small firms when times were good, and their exit when times got bad.
‘‘Given how we see the competitive dynamics in the industry playing out … we think that, over time, the industry will morph into something more like that of Australia’s, where larger residential construction firms predominate,’’ he said.
‘‘Large firms will increasingly dominate across all market segments, except for alterations, repairs and maintenance work, where a declining number of smaller players will operate.
‘‘This may reduce levels of volatility over time.’’
A report by Clark on the state of the residential building sector said that at the end of last year, there were more than 18,500 building firms, an increase of 58 per cent since 2000.
But most of these building firms were very small. The average number of employees was 2.3 and 86 per cent of firms had five or fewer staff.
The levels of scale were markedly different in Australia. ‘‘Only a handful of firms in New Zealand build more than 100 houses a year, compared to over a third of companies in Australia.’’
Here, smaller businesses needed to be competitive to survive, and this came down in part to their ability to cut unit construction costs.
Larger firms could more easily afford to invest in new methods and products such as off-site prefabrication and greater use of 3D printing. The continued lack of innovation by smaller firms was dragging the industry’s overall productivity down, Clark said.
Market segments were another factor in how well a company could compete.
While standalone houses would continue to be ‘‘the bedrock’’ of the industry, large firms would increasingly turn to medium- and high-density residential buildings to meet changes in demand.
‘‘A particular area of growth will be terraced housing and lowlevel apartment blocks, which currently attract high profit margins,’’ Clark said.
Should new urban planning legislation also be introduced, more land would be freed up land for building and development would speed up.
However, other regulatory changes were likely to be less popular and could impose costs on the industry.
Possible changes to the building code following the Kaikoura earthquake in November last year were likely to mean a tightening of standards, which would increase building costs and put pressure on margins, Clark said.