IN THE KNOW —
COVID bounce back and the challenges in ’22 So long 2020. Adieu 2021. Welcome to 2022. Whilst we are no doubt happy to see the back of 2020 and 2021, that last statement is a problem. Saying 2022 sounds like “2020 Part 2”. I don’t think anyone wants another 2020. Without doubt, the last two years have been a challenge at every level. Uncertainty for the future. Lockdowns. Concern for loved ones at home and overseas. Fear of an unseen and intangible assailant, fuelled by hyperventilating government and media forecasts and rhetoric. For building – particularly house building – this seems doubly so. For well over a decade the sector has struggled with growing pains. Housing demand has grown by around 16% per year since the Global Financial Crisis (GFC) of 2007/8. The Auckland growth rate is closer to 19% pa. Recently annual consents issued across New Zealand rose above 40,000 – a record not seen since the 1970s. Coping with this rate of growth is difficult. Eking out nearly a fifth more production each year from the same staff and investment without overstretching the company is a challenge. It seems like every developer is at full throttle. Every contractor we know is working all hours and struggling to get the skilled workers they need. Materials availability is a constant battle of moving goalposts. Suppliers introduce seemingly random price increases for no apparent reason. On continuous repeat in the background is the rhetoric of successive governments. The industry is inefficient. Housing is too costly. Materials are a rort. Quality of construction is poor. Building takes too long. We need more land – land is the answer. And on and on. New initiatives to solve the problem? We’ve seen more and more. Anyone remember Special Housing Areas? Not to mention the historic “success” of KiwiBuild. So, it all seems chaotic at present for sure. Not good. Deep breath. But it is worth taking the time out to take a look at the big picture and see where we are going.
Supply chain in crisis The current supply chain crisis is both a national and international problem. New Zealand can’t supply itself with the materials it needs for construction. We produce some materials indigenously – for example treated, sawn and machined timber. But for many other products, such as insulation, fixtures and fittings, pipework, sealants etc, we rely on imports. The reason for this is that there is sufficient market scale to warrant the investment in production plant for the higher bulk demand items, but less so in other manufactured lines. Hence, we import. Our international suppliers are similarly under stress. The USA has seen cut timber prices triple over the last year. Government policy there and globally has seen massive
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injections of capital into economies to offset the effects of COVID-19. New Zealand is no different. Populations have become cash rich and seek to protect their gains through capital investments. Housing investment is a primary mechanism. A housing boom has propagated around the world – and continued New Zealand’s decade long bull run. Consequently, less product is available to export to New Zealand and the premium to supply here has increased. Concurrent with an explosion in building product demand, our supply lifeline has been constricted. The initial economic impact of COVID-19 in 2020 was significant. International shippers anticipated recession as demand collapsed. They reduced ships in service, retiring older hulls. Routes were rationalised and less profitable destinations (i.e. New Zealand) saw reduced service. Consequently, import shipping costs have increased significantly. A last feature of the supply chain problem is the effect that COVID-19 has had on our offshore suppliers. Workforces have been depleted through illness and hospitalisation in countries like China. Similarly, transportation workers have been hit by both illness as well as the imposition of vaccine mandates in some countries. Both production and transportation has been consequently impacted that feeds back to New Zealand as a spike in materials costs that we import.
The demand chain New Zealand is in love with property investment. Buying. Renovating. Flicking on. Our future prosperity and pensions are inextricably linked to housing. Most financial investment consultants will recommend buying a rental property as a key element of a portfolio. With this in mind the sector as a whole has been heavily skewed into fulfilling this demand profile. The COVID-19 infusion of liquidity into the New Zealand market led to a sustained growth in demand for housing throughout the lockdown periods. People spending more time at home took on renovation projects. Money not spent on overseas holidays and travel to work became redirected into property investment and renovation work. This combination has spiked materials demand and magnified the capacity constraints in the market.
