Use overseas firm for KiwiBuild, Govt urged

Outfit with own supply chain would force pricing rethink, says expert

New Zealand remains one of the most expensive places in the world to buy building materials, with prices 20-30 per cent higher than in Australia but a building sector veteran says the Government has the solution.

It should contract a large overseas construction company to come here to deliver KiwiBuild houses, says Tony Sewell, former chief of the biggest property company in the South Island, Nga¯i Tahu Property.

With such a big contract, the company would likely bring its own supply chain and prompt a rethink among the three or four domestic suppliers of building materials, thereby benefiting all consumers.

“Once [the limited supply problem] is busted, it’s busted. It would force the New Zealand suppliers to change their strategy. There is no circuit breaker at the moment.”

People who were building one house could do nothing about prices and nor could even our biggest building companies, said Sewell, who is on the board of Generation Homes.

“Our market is small and therefore it is about scale. But I can’t believe when the Government has [100,000] houses to build it just doesn’t go and solve the scale problem.

“Give them [a major overseas builder] a Government contract and they’ll be here tomorrow.”

Having missed its first-year target, the Government has scrapped targets for this election cycle but says it still aims to build 100,000 affordable homes — half of them in Auckland — during the next decade.

And Housing and Urban Development Minister Phil Twyford called for an inquiry into the price of building materials soon after coming to power in 2017.

Sewell said incentivising local builders wouldn’t help with costs because they used existing suppliers who charged what people would pay in a market with limited competition.

“The problem is there is no one outfit who wants to build enough houses that will consider an alternative supply chain. I suggest that the Government is the only outfit that could actually do that.”

Twyford told the Weekend Herald that international companies were among those to have expressed an interest in KiwiBuild contracts.

“The two ways we can best drive down New Zealand’s very high build costs are bulk purchasing, taking advantage of large-scale multi-year orders, and through off-site manufacturing. Both are part of the KiwiBuild plan.”

While the Government wants the local industry to grow, it is “also very open to international companies which are used to working at scale”.

“That’s why we invited companies both here and overseas to pitch their ideas to KiwiBuild to set up offsite manufacturing plants in New Zealand,” Twyford said.

An offer to pitch had gained 105 responses by close last November, of which 44 had been invited to take part in the next stage of the offsite manufacturing evaluation. The minister would not disclose how many of the 44 were from overseas.

KiwiBuild expects the majority of commercial negotiations and contracts to be finalised by the end of the year.

Five years ago Sewell was considering adding house builder to the activities of Nga¯i Tahu, a property investment and development company.

He’d had staff research comparative costs of materials and told the Herald at the time he nearly fell over when he saw how much cheaper materials were in California.

A piece of 100mm by 50mm timber was four times the price here, wallboard was three times the price.

Nothing had changed, he said this week. New Zealand remains one of

Once [the limited supply problem] is busted, it’s busted. There is no circuit breaker at the moment. Tony Sewell

the most expensive places in the world to buy building materials.

Sewell said he was surprised the Government, with the volume of houses it had committed to build, was prepared to pay that price. “They are in a position to change things.”

The Commerce Commission will look at construction materials prices after it finishes its inquiry into fuel prices.

The Government has amended the Commerce Act 1986 to give the Commerce Commission power to conduct market or competition studies either on its own initiative or at the direction of the Minister of Commerce and Consumer Affairs.

The commission is receiving up to $1.5 million more each year to conduct these studies.

The Productivity Commission has estimated we pay between 20-30 per cent more than Australians for building materials.

Many industry commentators question whether that is a fair comparison and the need for an inquiry.

“We have a population the size of Sydney spread over a country the size of the UK,” John Tookey, head of AUT University’s Built Environment Engineering Department, told the Herald earlier.

The nearest big economy was 3000km away and merchants had to set up storage chains up and down our long country, which made for high overheads before the bespoke nature of Kiwi buildings was factored in.

And, the New Zealand Institute of Economic Research says benchmarking the costs of materials is difficult because of different materials used in various countries.

However, our above examples show, the cost of putting a roof over your head is enviably lower in Western Australia.

Juliette Sivertsen and husband John Barrett found their dream site near Moke Lake in the Queenstown hills but material costs mean they are building a no-frills rectangular home in the town they fell in love with on their honeymoon.

Their alpine section was so densely covered in native bush and wilding pines they couldn’t get on to the property.

“There was a gate and a fence,” said Sivertsen, a journalist for NZME. They bought a seven-tonne digger and cleared a short driveway, then a space to pitch a tent and much later a building platform. “It’s a hugely ambitious project. It might make or break us but it’s all good at the moment.”

Barrett, a construction manager in Auckland, dug the trenches, and holes for septic and water tanks and built a 10sq m sleepout where they live while working on the house.

“We have gone for a plain rectangular shape because that was the cheapest. We scrapped an entranceway because every time you add a corner the cost goes up.” A deck, too, will have to wait.

They were told to expect to pay at least $3000sq m to build in Queenstown but compromising on design and doing about $150,000 of the work themselves had pared that to about $2200.

The house has a timber frame and board and batten cladding and will be painted by them with the help of friends.

In contrast, Kiwi expat Kim Mitchell is building a bigger home with high specs in Margaret River, a two-hour drive south of Perth, with her Australian partner Steve Ronan, for $1300 per square metre. The region is not prone to earthquakes and building codes are different. Their home is built with a double layer of bricks on a concrete slab but does not have a timber frame. The home has two living areas, a large kitchen with scullery and a built-in wine fridge. Ronan owns a polished concrete company and provided the floors himself, saving about $21,000, but Mitchell said she was shocked at the cost compared to New Zealand. “It’s really cheap to build here, it’s nuts.”

She had visited a luxury show home which she said could be built for as little as $2300sq m.

“That’s luxury. It has just blown me away. I love New Zealand, don’t get me wrong, and I’d probably move back in a heartbeat, but financially it doesn’t make sense.”

Everyone who sees the logs stacked at Mount Maunganui for shipping overseas asks the question. Why are we exporting so much wood in raw commodity form? And when we read that the price of building timber here is about four times the price in California and nearly a third higher than its cost in Australia — and is contributing significantly to our unaffordable housing prices — the question becomes, why, in a climate where trees grow so easily, do we not have a thriving industry of finished timber products here?

The answer usually given to both questions is one of distance and scale. Distance makes it expensive to export finished building products and the small New Zealand market means the prices would have to be high to provide a return on the investment in an industry here. Those prices would be as high as, or higher, than imported products. If New Zealand could produce them cheaper, somebody here would be doing so.

Yet the suspicion persists that something is wrong with the supply in New Zealand, something is making materials more expensive than they should be. The Government has asked the Commerce Commission to investigate the suppliers, much as the Productivity Commission did for the previous Government. It found the scale of local building companies to be one of the problems.

Today we are reporting the view of at least one industry participant who thinks KiwiBuild has the scale to make a difference if the bulk of the programme is awarded to one big overseas contract.

Tony Sewell, former chief executive of Ngai Tahu Property, the largest property company in the South Island, and now a director of Generation Homes, thinks the Government should offer a contract large enough to make it worthwhile for the winner to set up its own supply line. “The problem is there is no one outfit (here) who wants to build enough houses to consider an alternative supply line,” he told Phil Taylor. “The Government is the only outfit that could do that.”

Housing Minister Phil Twyford said the Government is “very open to international companies which are used to working at scale” but said he also wants the domestic industry to grow. It has received 105 expressions of interest in KiwiBuild from foreign and domestic builders, of which 44 have been invited to present more detailed proposals over the next few months. The number will be further whittled down after July and Twyford expects the majority of contracts to be let by the year’s end.

It does not sound like one big supplier will get the bulk of the order for 100,000 houses over 10 years. The

Yet the suspicion persists that something is wrong with the supply in NZ, something is making materials more expensive than they should be.

Government’s economic advisers would naturally be worried that a single supplier of that scale could dominate the industry to an unhealthy degree, crowding out existing supply lines in a short time, supplying KiwiBuild projects with cheaper materials but charging other builders as much as the market will bear.

House builders here have become accustomed to bearing very high prices by international standards. But that is not the only reason house construction is costly here. Kiwis also want “bespoke” houses, not standard designs, which makes less use of cheaper methods such as off-site fabrication. But we need to get building costs down and one way or another KiwiBuild could be used to do it.