Avoiding choking on Auckland’s building boom

This article first appeared in Mitre 10 Trade Quarterly – Summer 2016.

“Capacity” is a word that is often heard with reference to Auckland’s current building boom.  The stresses are not surprising given that residential consent numbers in the region have almost trebled since 2011, while there has also been a 43% surge in the volume of non-residential consents in Auckland over the last 11 months.

The trouble for Auckland is that the upturn is far from finished.  The city’s estimated population increased by almost 50,000 people over the last year, and with an average of about 3.1 people per household, that growth equates to almost 16,000 new dwellings needed to house all the new arrivals.  With the residential build rate still sitting below 10,000pa, it’s obvious that things are not moving fast enough to keep up with demand, let alone start to address the undersupply of about 32,000 dwellings that has accumulated over the last decade.

The extent of the growth required in residential activity in Auckland dwarfs the rebuild in Canterbury over the last five years (see Graph 1).  With residential work winding down in Christchurch, there is scope to shift some of the building industry’s resources northwards to help out in Auckland.  But the critical issue facing everyone, from homeowners to training organisations to businesses, is how the industry is going to cope with the persistence of very strong demand.

Graph 1

For tradespeople, it becomes increasingly difficult to attract and retain staff.  Responses to the NZIER’s Quarterly Survey of Business Opinion show that for firms involved in the building industry, getting skilled labour is the most difficult it has been in over 20 years (see Graph 2).  Unskilled labour is also hard to come by, although the fact that the labour market is not quite as tight in some other parts of the economy means that unskilled workers are easier to come by than they were in 2004 and 2005.  Pay rates are forced up, and with high workloads, these cost increases often get passed on to the customer.

Graph 2

Expanding your business in response to prospects of more work can bring its own challenges, particularly for a small business.  Taking on new staff members often means covering additional costs upfront, with the increase in work or revenue taking some time to flow through.  Cash flow needs to be even more carefully managed than normal to ensure that your business doesn’t bite off more than it can chew.

The increased volume of work also intensifies the need to keep a close eye on quality.  Rushed jobs and overworked staff have the potential to result in mistakes, but tradespeople that are in for the long haul will be keen to maintain their standards and protect their reputation.  Upward pressure on labour costs has also resulted in some contractors trying to source componentry directly from overseas to offset their increased wage bill and avoid having to pass on higher costs to their customers.  However, this approach runs the risk of leaving the customer with substandard product that will not stand the test of time.  As we’ve seen before in the building industry, cutting corners has the potential to result in big problems further down the track.

Bearing these issues in mind, now is a great time to be involved in the construction sector in New Zealand, and in Auckland in particular.  The industry can invest in further expanding its capacity, both in terms of labour and capital resources, in the knowledge that the pipeline of work, particularly in the residential subsector, stretches out to 2021 and beyond.

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