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Construction Sector Turbulence: The Six Factors Responsible
In the past few weeks, many construction companies and developers have folded due to the pressures on the building industry.
Companies such as the Bay of Plenty's Oceanside Homes, two South Auckland developers, and Wellington's Armstrong Downes Commercial have all closed their doors. These closures paint a grave picture of the pain that's coming for the construction industry in the coming months.
The New Zealand Herald property editor, Anne Gibson, remarked that several factors are to blame for the perfect storm that’s brewing in the construction sector.
She stated that six unique factors are driving this sector wide turbulence. These being: inflation, material shortages, extremely high volume of construction, labour shortages, difficulties gaining access to finance, and the ongoing impact of the pandemic.
These have amalgamated to exacerbate latent industry issues that have long been brewing under the surface. Gibson stated that the impact of these factors has caused many businesses to financially struggle during a time when the wider industry is booming.
Worryingly, it seems that the current stories in the media appear to be the tip of the iceberg when it comes to the struggles within the construction sector.
According to Andrew Bayly, the National Party's construction spokesperson, more than 100 construction companies have gone into liquidation this year alone. With Master Builders Association vice-president Johnny Calley recently warning that more companies would fold due to the abrupt rise in the price of materials.
The high price of building materials in New Zealand has caused many to ask questions about the concentration of market influence among a small number of companies.
Reports have indicated that 94 percent of the GIB market is controlled by the GIB board, 89 percent of glass wool supply is controlled by only three firms, and 85 per cent of the concrete industry is controlled by just two companies.
Last November, the Government stepped in and asked the Commerce Commission to investigate this problem.
One of the Jarden analysts, Grant Swanepoel, looked at Fletchers’ dominance and found that it has 94 percent of the market share on GIB boards via Winstone Wallboards, 55 percent hold of the cement market, and a 40 to 50 percent hold of glass wool insulation.
Fletcher's Placemakers has a hold on roughly a quarter of the merchant market regarding small to medium-sized buildings. Additionally, Carters also has a dominant market position supplying materials to businesses in the construction sector.
These two companies have both made submissions to the Commerce Commission asserting that they are not entirely culpable and that there are numerous factors contributing to the high cost of building in New Zealand, such as tax rates and building consent processes.
Fletchers’ CEO, Ross Taylor, told the Commission that building materials were a minor portion of the overall cost of house prices, being only 19 percent of the cost of a new house.
Taylor urged the Commission that they ought to investigate taxes, and land and consent costs to get a clearer picture for why prices are currently high.
Whereas Carter Holt Harvey challenged the claim that they have too much market power, stating that there are numerous other competitors in the market.
Anne Gibson drew a comparison between the Commerce Commission’s investigation into market influence within the construction sector, to what happened recently in the supermarket industry.
The Government has rolled out a raft of changes within the supermarket industry to try and increase competition in a market which is dominated by two huge suppliers.
Once the Commerce Commission publishes its findings on the construction industry, it becomes a decision for the Government about whether they intervene and what the extent of this intervention should be.
Whether the Commerce Commission findings do result in changes will depend largely on the Government’s will.
Concerningly, the effect of this six-headed hydra attacking the construction industry won't just be felt by those within the sector. The construction sector often acts as a canary in a coalmine for other sectors, and the pressures the industry is currently facing are already being felt across the wider national economy.
The key question we’re left with is how far these economic pressures will spread and how long the effects will be felt for. The answer to both of these questions is unclear, but hopefully the industry is offered relief from these pressures before things become abysmal.