IN THE MEDIA

New builds: the good, the bad, and the ugly

The age-old question of whether it is better to build a new home or buy an existing one has become more pertinent than ever, Sally Lindsay writes.

In recent years incentives to build or to buy a new build have multiplied. It is easier to get a loan for a new build, for example, because the Reserve Bank’s loan-to-value ratios, which limit bank lending to low-deposit borrowers, do not apply. Incentives are also being thrown at investors to buy new builds. They are exempt from the Government’s new tax wiping out mortgage interest as an expense against rental income over a four-year period, and the bright-line test stays at five years instead of the stretch to 10 for existing homes. So how do build costs compare? There are a range of figures from different sources, but multiple variables make it difficult to compare. The general consensus is new builds remain cheaper than existing properties. Information from CoreLogic provides some evidence of that. It shows that last year buyers paid a national average of $829,747 for what are classified new builds compared with a national average of $889,055 for existing properties. CoreLogic chief property economist Kelvin Davidson says buying a new build or finding land and then building, can be complicated as land is not easy to find and the stock of available new builds is smaller than the rest of the market. So how much does it cost to build? Figures from Statistics New Zealand show the national average cost to build per m2 was $2325, in the year ending June. That figure does not include land, design or consent costs. In November, Canstar’s updated Building Costs: How Much is it to Build a House in New Zealand revealed that nationally the average price per square metre increased from $2359 in 2020 to $2463 at the end of last year. That’s an increase of 4.4% – a far smaller percentage than the increase in median house prices. However, the average price of a new build has increased less, by 3.45%, from $368,667 in 2020 to $381,404 late last year, and that’s because smaller houses are being built. Although nationally the average size is pretty much the same, 156m2 to just 155m2, in some areas downsizing is more pronounced. Wellington now boasts the biggest per m2 costs, while Taranaki and Canterbury are the cheapest. However, these are just average prices. Costs vary build to build, due to differing house sizes, and these numbers are just estimates based on building consent applications. HIDDEN COSTS Even without inflation, when pricing a new build there are other factors involved that push up costs. “When most architects and designers submit building consent applications the build value figure they put in is as low as possible, to keep the consent costs down because the value of the build impacts the consent fee,” says Trent Simpkin, of Arcline Architecture. “Yes, it could be considered inaccurate, but councils should only need to know the value of the consentable items. So, for example, most of our houses we say are $2500m2 when, in reality, they’re more of a $3500m2 build. “The shape and circumference of a home are big players in the cost of the build,” says Simpkin. A square house has the least perimeter of any shape, so is the cheapest to build as it requires less cladding, insulation, roofing, etc. Whereas a house the same size split into individual pods will cost more. Overall, Simpkin estimates at the end of last year an average price of over $3000m2 is a more realistic figure. To keep costs down, Simpkin advises avoiding the following, which could push your build closer to $4000m2: • elevated sites, exposed to the wind • steep (or even not so steep) sites that require retaining walls • unsuitable ground requiring engineering design • large square metres of glass (requiring steel portals) • open expanses of living areas (requiring engineering due to lack of walls to brace) • cantilevered decks, roofs, floors • expensive cladding, like cedar, and roofing, such as tray • difficult site access • any build methods that are time consuming. But while myriad factors affect the cost of a build, one thing is clear; more, smaller homes are being built. Ten years ago there were fewer homes built than in the mid-1970s.However, since then the pace of building has ramped up. In 2020, 39,420 new dwellings were consented. To September last year the number had already reached 36,040 consents, with a third of the year left. In the year to the end of October the number of consents were at a record high of 47,715. Region to region, while there’s still a difference in the size of houses we’re building, pretty much across the board all the homes being built are smaller. TIMBER KEY FACTOR Construction cost growth has a major effect on building prices. CoreLogic’s Cordell Construction Cost Index (CCCI) reveals on an annual basis the country’s construction cost growth rose from 4.5% in the 12 months to the second quarter last year to 5.5% in 12 months to the third quarter, the fastest annual rate since the first quarter of 2018 (when growth was already into a slowdown phase). Cordell data shows timber prices, particularly structural timber and cladding, have been a key contributor to overall cost increases. Metal costs and products have also been a factor. Davidson says higher construction costs are likely to add to affordability challenges already at play across the established housing market. “For anyone who is looking to build or to renovate, or for someone who owns a business involved in the residential construction industry, it means they are all likely to be facing significantly higher costs.” With the cost of building materials rising and supply delays for some products, many builders are ordering materials four or five months in advance. Some say there is an email every week saying a price has risen and if they don’t plan forward they will struggle. Independent economist Tony Alexander says construction costs are putting unprecedented pressure on building companies. He warns smaller firms are at risk of going bust, a scenario that could leave many homeowners and contractors in the lurch. “Within two to three years, we’re going to see a wave of collapses.” A lot of “inexperienced, undercapitalised people” had tried to ride the construction boom and were now facing challenges on multiple fronts, including hikes in material costs, supply chain delays, staff shortages and credit tightening. “It is going to lead to quite a number of builders going under. And not just the builders – contractors and suppliers too,” says Alexander. “There are going to be cashflow difficulties for these businesses.”

ESCALATION CLAUSES Another factor, says Certified Builders chief executive Grant Florence, is the days of high inflation escalation clauses will re-appear. Rising construction costs are making it difficult for builders to deliver on fixedrate contracts. It is now difficult to obtain a fixed price contract. Currently, builders are left with little or no room to move financially as too often clients choose the cheapest bid, which typically only covers costs. If builders are to survive, some projects will need to be repriced by agreement. The combination of rising construction costs, higher interest rates and the acceleration in supply could lead to a reduction in residential building this year. However, the severe backlog of work that exists, caused by extreme capacity and labour constraints, will keep construction at more elevated levels than normal. House prices and residential construction cycle together. Falling house prices tilt affordability towards existing houses and away from new builds, but it is uncertain this will now be the case. Meanwhile, the Commerce Commission is launching a probe into building materials for the residential market. The Government has long suspected timber and Gib board is overpriced and sold by too few players. Commerce Minister David Clark says there have been long-standing concerns about potential competition issues, particularly due to the highly concentrated nature of some markets in the supply chain. There have also been numerous reports in recent months of people buying homes off-the-plan, only for builders to come back looking for thousands of dollars more in unexpected costs. Alexander says it is not commercially realistic for customers to expect builders to bear all the risks and then be upset when the builder fails. Room needs to be left in contracts so the builder can charge through unexpected price increases. “On the other side, builders need to meet deadlines.”

In recent years incentives to build or to buy a new build have multiplied.

It is easier to get a loan for a new build, for example, because the Reserve Bank’s loan-to-value ratios, which limit bank lending to low-deposit borrowers, do not apply. Incentives are also being thrown at investors to buy new builds. They are exempt from the Government’s new tax wiping out mortgage interest as an expense against rental income over a four-year period, and the bright-line test stays at five years instead of the stretch to 10 for existing homes. PMCA licensed copy. You may not further copy, reproduce, record, retransmit, sell, publish, distribute, share or store this in the prior written consent of the Print Media Copyright Agency. Phone +64-09-306 1657 or email info@pmca.co.nz for further info New Zealand Property Investor, New Zealand