Builders have never been busier, but they’re increasingly pessimistic. The Government hopes its reassurances about ending the boom-bust cycle will turn that around, Thomas Coughlan reports.

The construction sector should be smiling. Compared to retail, manufacturing, and media, these are boom times for the industry.

The sector is in the midst of ramping up, and Housing and Urban Development Minister Phil Twyford has begun one of the largest state-backed house building programmes in generations.

But a poll taken before last weekend’s construction industry forum in Wellington showed rising pessimism in the sector.

Of the building industry players surveyed, 52 percent believed the sector was performing badly or terribly, and 29 percent thought its performance was average. Just 19 percent thought the sector’s performance was good.

Never had it so good?

The industry is gradually realising the boom times might be drawing to their natural end.

Most analysts believe house prices are unlikely to continue increasing as fast as they have over the past decade. The Auckland market is severely overvalued, having increased 56.4 percent in the last five years.

Helen O’Sullivan, chief executive of Ockham Residential, said softening price inflation has a knock-on effect in the construction industry.

“One of the issues in the construction sector is we’re seeing house price inflation soften, which is good because realistically those rates couldn’t go up the way they were,” she said.

“But it does mean in terms of managing cost on projects there has been a period of time when the price inflation was enough to cover cost inflation – that’s not the case any more, meaning the margins get compressed, meaning cost control is more important than ever before.”

The cost of building a home has long been a concern in New Zealand. Growth in Statistics NZ’s Capital Goods Price Index (CGPI) for dwellings and outbuildings has outpaced CPI inflation every year since 1980. This is especially pronounced in boom periods.

CGPI has grown at 4.3 percent a year, while the CPI has averaged 3.5 percent growth. During the 2003-2008 boom, CGPI growth averaged seven percent a year, while the CPI grew just 2.7 percent a year on average over the same period.

Adding to the problem of overall housing affordability, construction firms have tended to maximise return by building houses at the more expensive, luxury end of the market, rather than affordable homes.

The Government currently estimates that only five percent of new builds are sold in the lower quartile of house prices, meaning that even a construction boom has done little to alleviate the chronic unaffordability of New Zealand homes.

Boom and bust

Another significant concern is the vulnerability of the industry to boom and bust cycles.

A 2012 Productivity Commission paper on the industry identified this as one of the most pressing concerns facing the sector.

In 2005, in the midst of a construction boom, nearly 30,000 building consents were issued, but by 2011, just 13,236 new homes were being consented.

By June 2017, the figure was back up to 30,453. This significant cyclical effect wreaks havoc on industry confidence and makes it particularly difficult to train new staff.

Trainees are often attracted by the industry’s promise during a boom, but by the time they finish their training the industry could be in the middle of a bust. By the time it ramps up again, those workers are likely to have left the industry. Or even the country, as they did during the Global Financial Crisis when they migrated to Australia’s building sites and mines.

The industry survey identified a lack of skilled labour as the most critical issue facing the sector, ahead of risk allocation.

Phil the builder, can he fix it?

Twyford told the conference many of the Government’s policies aimed to smooth the cycle.

“Whenever you talk about the construction industry all roads lead back to the boom and bust cycle,” he said.

But he promised that changes to the tax system would smooth this out by discouraging housing speculation.

Large-scale procurement from Government in the form of KiwiBuild would also mean consistent demand in the housing construction sector.

“We’re going to use the Government’s ability as a major purchaser of construction services,” Twyford said.

“We’re going to leverage that to really incentivise trade services and apprenticeships.”

Under Twyford’s plan the Government will become a major purchaser of construction services.

Currently the construction industry builds over 30,000 homes a year. Once KiwiBuild is fully “ramped up”, to use Twyford’s term, it will build an additional 12,000 on top of current supply.

If it keeps this up until 2028, it will be one of the longest sustained building booms in New Zealand’s history. Data from Statistics NZ shows in the last 50 years, the average number of new consents issued was 23,000. Nor is it wholly unprecedented. In 1974 an excess of 40,000 homes were built.

But Opposition Leader Simon Bridges is doubtful KiwiBuild will achieve its targets. He told the conference banks had advised him it would have a “displacement effect” meaning it would simply suck up existing capacity.

Bridges did concede that as the market softened, some developments that might have stalled and collapsed would be picked up by KiwiBuild.

Even if KiwiBuild were to displace existing developments, it would still achieve the effect of making selling more new builds in the lower quartile of house prices, increasing that number from five percent currently to between 25 and 33 percent, depending on whether the programme displaced existing developments.

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