As the population of New Zealand booms and our largest city grinds to a standstill, the government faces a once in a generation challenge – housing the nation. Don Rowe spoke to Master Builders’ David Kelly about the state of the New Zealand construction industry, and how the private sector will play an essential role in solving the housing crisis.
Building a home is one of the most financially and emotionally exhaustive processes one can go through in life. From securing the land, to raising the capital, to trusting any number of random sub-contractors to pull through, a potential homeowner is at risk every step of the way, risking years of toil and considerable sums in pursuit of what is often a bucket list item.
People are anxious, and rightly so. As the leaky home scandal, Stonewood Homes collapse and botched Christchurch rebuild show, construction on anything from a residential to developmental scale is fraught with dangers.
Ahead of us lies the greatest construction effort in the history of the country, as Labour attempt to house the nation through their KiwiBuild programme – 100,000 homes in ten years. Is it achievable? What risks must be adverted? And what part does the private sector have to play, both in constructing and guaranteeing the homes?
I spoke with Registered Master Builders chief executive David Kelly to find out.
You were on Morning Report recently talking about prefabrication and KiwiBuild, so let’s start there – is KiwiBuild a realistic proposition, and how would prefab fit in if so?
We have been under-building in the residential sector for a decade now. There is a need to lift the level of residential construction, and I don’t think anyone is arguing that point. Our question is where can we play a constructive part in that. We think there are five things that are obstacles to this happening. One is the availability of land, and land at a reasonable price. Another is the availability of finance for developers. There’s the skills issue – have we got enough labour? There’s a question around infrastructure, do we have it in place at the right time, particularly around residential construction? And then there’s consents and the RMA. Master Builders can’t solve all of those, we can’t do much about the issue of land and its price, we can’t really do much around the infrastructure side, but there are two areas where we think we can play a part.
One is looking at different ways of financing developments, the other one is around labour supply and how you organise the physical construction.
Our view is that KiwiBuild is ambitious, it’s a huge undertaking for a government to try and do all of the planning, to think about all of those issues, and to organise all of the physical construction. So what we’ve said to the government is that we’re open to partnering, because we’ve got a network; we’ve got 23 branches around the country, we’ve got many of the best builders, and so we can help if they’re open to it. If we know what they want to build – where and when, we can help coordinate our members to do that work and help with the process of selection. That’s the offer, and we’re confident we can do that, but it does mean that the government needs to partner with the industry, and they need to think about doing it in a different way.
What I know from the experience in Christchurch is that when builders and firms have certainty around work, they’re actually pretty good at finding the resources. I think KiwiBuild is realistic provided the government does the planning, they do the things that they need to do in terms of working with local government, and then partner and do that planning with the private sector, giving as much notice as they can so that businesses can make commercial decisions around investment.
That leads on to prefabrication. It’s about doing things differently. I have no doubt that prefabrication will become a bigger part of construction, but it won’t be necessarily the dominant part, and it shouldn’t be seen as a silver bullet. If you have that certainty I mentioned, businesses will look at whether there’s an opportunity for greater use of technology like prefabrication or offsite manufacturing as part of that. That means an investment in plants as well as skills, so it’s not necessarily just the traditional carpenter – it can also be people in a factory setting or conducting the assembly onsite.
There’s a bit of a lead time for business to make those commercial decisions and one of the keys will be how much certainty do businesses have around the amount of work they’re going to get, and whether that makes the case for the investment that they’ll need to make.
Walk me through the Registered Master Builders Guarantee – where does it fit in in a climate of huge expansion and construction?
Our guarantee is unique within the market. We’ve been around for 26 years – the longest of any guarantee. We’ve issued 140,000 guarantees to Kiwis in that time. We are currently providing cover for some $34 billion worth of properties built by Master Builders. Our model is what you could call a mutual model. We only offer it through our members because they are Master Builders so we can be confident of their quality standards and robust business practices. That’s why it is restricted to our members.
It’s also because if something goes wrong then we have the ability to talk to our members and to tell them to go back and fix it. The issue comes when, as I’m sure you’re aware, the business is no longer around because of financial difficulty or whatever else. What we’re able to do is work with other Master Builders to complete the job. In that respect we’ve got a really good model where we’ve got other members that we trust to have the job completed, and if we need to contribute to that we will, so the homeowner doesn’t have to pay a lot of extra money.
The biggest example of how well the guarantee works is the Stonewood collapse in 2015. It’s a good example of a larger-scale collapse, as far as we can tell it’s the biggest collapse of a housing company in New Zealand’s residential construction history. They had about 110 houses partway through construction, and we were able to work with the new owner of Stonewood and with the receivers in a negotiation that ended up with all 110 of those houses being completed, and the homeowners did not have to contribute any additional money.
When we heard about the collapse we communicated with all of the home owners who had guarantees to assure them that we were working with the receivers and potential new owners. It allowed them to have at least some information and some peace of mind that we’re not all walking away, and as they went through the process the feedback we had from people was that it was difficult but they were very happy with the result. That’s the mutual model and when working with the new owner (who also became a member of Master Builders) we were able to transfer the guarantee.
You likely didn’t see anything in the media about this apart from the initial collapse. That’s because under our model we’ve got a very robust financial structure. We have independent auditors, we have independent actuaries that look across our data over 26 years, and report to the board independently. These are the processes we need to allow us to manage a major collapse like that. It proved our model works really well.
We’re very proud of the fact that we are robust, we’re quite conservative in our future provisions t because that’s really important. We don’t take money out early, we’d rather leave the profit in the business so that we make sure we can look after our customers.
Building a house is such a huge financial and emotional undertaking. With that much money at stake and that many people potentially affected, do you believe the government will make guarantees compulsory? Should they?
I don’t know. I think there’s a nuance to this question in that people don’t understand what guarantees are, or they think they’re something that they’re not. So the first part is we think people should take out guarantees. Sometimes people think ‘well why would I take out a guarantee? I’ve got a builder I trust, they’ve got a good track record, they’re going to finish my build and they’ll do a good job,’ and that’s great, but the issue is that sometimes life intervenes. Sometimes something might happen to the business or the individual. They might have an illness, they might have an injury, they might not be able to complete the build.
If you haven’t got a guarantee what are you going to do then? Because if the business gets into trouble, if you don’t have a guarantee, then you’re on your own and you have to find another builder yourself. They’re going to put an additional premium on it, that can be a really difficult situation. The first thing we say is ‘you should take out a guarantee – it’s not about not trusting your builder it’s about being sensible. You take out insurance on your car when you don’t intend on crashing it, because sometimes things can go wrong.
In terms of it becoming compulsory, I think some of the discussion is that people like Phil Goff have the view that it takes the place of the council liability. But that’s a completely different product, and there’s no-one that offers that as far as I’m aware of in New Zealand. And rightly so, because then you’d say essentially the business is taking over the consenting process, and you’re going to have to be a whole lot more involved. You’d have to look in more detail at what’s going to be designed, who’s inspecting it and so on if you’re going to take on that liability. And there are real questions around what that would cost. So we need to be clear about what people are talking about when they’re talking about a guarantee.
Secondly, if you move to compulsory warranties then you need to regulate to some degree what the guarantees are. Then there is a risk that you start to regulate it so hard that you then drive up the costs. We’ve got a model that’s worked really well, it’s given good value to our customers, and if you’re just going to add a whole lot of cost on for compliance then what have you gained?
We welcome the discussion around whether it should be compulsory, let’s understand what would that mean, and how much additional cost that would add if you start regulating it.
The reaction to Phil Goff’s comments in some quarters was essentially that builders should take on the liability – do a good job and it won’t be a problem.
We essentially do through our guarantees, but what I’m saying is that we also know that there’s a consenting process where under law the council has a responsibility to make sure that what’s being designed meets the building code. People pay for that through their consents. If you want to shift that liability there’s a significant cost to that, and it won’t be as easy as people think. The theory is fine, but as I say that’s changing a lot, and as soon as you change something you will find unintended consequences. You need to think about the timing of bringing something like that in as well, and how do you transition if you want to do that. There’s a lot to think through in terms of how it all works.
With so many houses needed to be built, what precautions are being taken to make sure there’s not another industry-wide crisis like the leaky homes scandal? You say some of these builders couldn’t even get a guarantee, but regardless we need them to make something like KiwiBuild a reality. What precautions are being taken?
Under the current regime a lot of that falls back on the councils through their consenting process, ensuring that their design and construction meet the building code. We believe we should move to more of a quality assurance model where you look closely at the track record of the builder, how long have they been around, do they have any history of disputes, and how complex is the build.
I’m looking out my window at houses on Mt Victoria, and they’re three different levels, lots of glass, architecturally designed, really nice but quite complex to build versus an on-the-flat, standardised house that has traditional eaves and so on – that’s actually pretty low risk. We would say it’s time to move to a process that looks at the track record of the builder and whether or not they have a guarantee, then factoring in that guarantee as part of the quality assurance. That’s where we should head, and the guarantees do play a part.
Do you believe guarantees may alleviate some of the anxiety people might feel around building new?
I do, and we’re seeing that consumers are more and more interested in guarantees, in fact most of the banks when you borrow to build a new house will insist that you have a guarantee. Master Builders is a really well respected guarantee. Absolutely I think we see it in the behaviour of the consumers and we see it in the banks saying ‘if you don’t have a guarantee then we probably won’t lend you the money’. Think of it from the banks point of view – their risk is that if the project falls over then their only equity really is in the land, because a half-built house won’t sell for anything. It’s in their interest that someone like Master Builders with a guarantee stands behind the build.
There’s currently a squeeze on finance from most of the big banks. What are the flow-on effects of that in terms of the building industry?
It is becoming harder for some consumers to get finance. Builders have been pretty busy over the last two to three years so they haven’t been too worried. Now we’re starting to hear a little more noise from builders saying that the restriction from banks is starting to be seen. But the other thing that we’re starting to hear more noise about is what I’d call the small-scale development.
A lot of our builders for instance don’t just build to-order but they might do small-scale property development as well. They might build two or three houses in Auckland where in-fill housing is a big part of the development that’s needed. It might be a large section or two sections that are aggregated together with one house that could be moved to a better position on the side and then you could build two or three townhouses. That’s a small-scale development. The conditions on lending are becoming tougher. What we’re hearing from our members is that where people used to be able to borrow, the banks are now wanting significantly more equity plus higher pre-sales, and that’s commercially quite risky. They’re saying it’s just not worth it and we’re not going to do it.
I’m not having a go at banks, it’s just that it doesn’t fit their risk profile. What we know from Master Builders is that if a development fails then we’re able to find other builders to complete it. For a bank that’s nowhere near as easy, it’s just not where they want to spend their time. We’ve been talking to potential partners about a different way of financing those developments and we’ve got some quite well developed ideas that we hope we’ll be able to talk about in more detail in a few months time.
At the same time as there’s a constraint on finance, there’s also some significant changes in terms of immigration. How has that affected labour supply, and what about industry confidence in that supply going forward?
I’m not overly concerned about that, we’ve had several discussions with the key ministers about immigration and they’ve made it very clear that in terms of skilled migration for the construction industry they’re not going to turn off the tap. So there’s already the opportunity to bring people in under the skilled migration category and people are doing that. They’ve also got a special KiwiBuild visa which will allow an additional 1500 people to come in. So we’re not overly worried about that.
Looking at the access to labour as a whole, there’s a wider movement in society towards more equality and opening up workplaces to women and LGBTQI communities. Do you believe the industry is a safe place for them at this point, and what are training institutions doing to make it more so? There’s a certain perception of the construction industry.
I honestly couldn’t comment on safety as I just don’t know, but what is clear is that the construction industry is not attracting enough women, and in terms of diversity the construction industry is not very good. There’s multiple things that we need to work on. One is the industry attractiveness overall to everyone including women and people from LGBTQI. That starts in schools. Schools have generally not in our view promoted the trades as an attractive career – it’s tended to be more slanted we believe towards academic training and universities. So it starts there.
Secondly the training institutions are thinking much more creatively about how we attract people including women into the construction industry. There is action underway but on the building side we need to get our head around how do we do this and how do we encourage employers to think about what are the skills you need. But in the first place we want people to be interested in the industry.
That’s a huge part of it right? When we tell kids that building is for boys not girls, it’s not exactly an exciting prospect walking into the industry.
I’m involved in the Construction Industry Council which I chair and one of our three priorities is trying to raise awareness around the attractiveness of the industry and the wide variety of career paths, so it’s not all about the physical work, it’s about the design side too. We’ve talked about prefabrication which will open a whole range of different skills, there will be new IT components, so we need to be able to describe this area in a way that shows it can be a really exciting career and one that can take you all around the world depending on what skills you’ve got.
New Zealanders are very attractive as employees in all parts of the world so we need to start with some of that stuff.
That’s an interesting point, I hadn’t considered it as a matter of reframing it as more than just girls swinging hammers, because it’s so much more than that.
Exactly, and in a lot of residential building businesses, the unsung heroes are often the female partners who are running the business side of things. One of the things that Master Builders promote strongly is not just the technical construction part of the business but running your business well. Often it is the partners who do a big part of that.
They’re unsung heroes in terms of thinking about how well the business is going, dealing with relationships with employees, suppliers and contractors, about what the books are looking like and whether you’re actually making money or just doing lots of work. Those things are critically important and that should be recognised.
Another unsung hero in the construction industry are the folk cooking the sausages outside Bunnings, and I have to know, in the opinion of RMB, do you or do you not take the onions, and what is the opinion on mustard?
I do take the onions, and I like mustard, but I’ll always check what they’ve got as I like a hotter mustard. I think that’s very important and I cannot emphasise that enough.