The reasons why new houses cost so much

A new report focusing on the cost of new residential developments, commissioned by Fetcher Building, has some surprising findings.

“Residential land is the largest cost contributor to new housing development and the cost is highly variable between New Zealand and Australian cities”.

 

The Australian myth

This is even to the surprise of Fletcher Building. For a long time now the commentary around un-affordable development and expensive homes has always mentioned building costs. It’s been a headlining factor. Generally, it’s taken as a given that development in Australia is easier because building materials are more affordable. While this can be true when you’re comparing the price of 2×4 timbers at Bunnings in each country, according to this report, it isn’t necessarily the case for the overall development cost. The pricing isn’t that different. In most cases it was actually slightly cheaper at an overall level in New Zealand.

The forgotten factors

Two factors that almost never make the headlines are GST and developer profit margins. According to the report, development profit margins are higher in New Zealand than in Australia. New Zealand developer’s profit margins are four percent fatter than Australian’s eight percent. When you add this to New Zealand’s almost double GST rate it’s easy to see where costs could look to be inflated compared to Australia.

The unfortunate truth

The Deloitte report says that the most significant portion of the total cost of the development was land and infrastructure. The report cited that over the last decade, the cost of land has increased far more dramatically than the cost of building materials or labour.

These infrastructure costs often came in the form of development contributions. While it does concede that the cost of building materials has risen, the increase was nowhere near as much as the combined cost of land and infrastructure.

Headlines and Soundbites

I know the above graph is only one measure that has contributed to this headline. Yet, I am conscious that phrasing and sound bites can make things sound more dramatic than they actually are. Land is undoubtedly the most expensive part of new building new. It’s the most expensive part of buying existing property too. Land is finite.  We have always known this.

I guess above all, this report debunks the myth that material and labour costs are more in New Zealand than in Australian. It would seem that we’ve just been bitching about the wrong thing. Treating our large scale construction companies as scape-goats even. Meanwhile they’ve been falling like dominoes. It has been easy to blame an industry that has lots of little moving parts that are hard to quantify. Now we know. Materials are expensive but land is always going to be the most costly part – followed by readying the land for development. Especially in greenfields and brownfields.

So, solutions?

While the purpose of this report wasn’t to find solutions, Fletcher Building CEO, Ross Taylor says the report has made the cost of new housing development very transparent. Some may read this as: “you can’t blame us for the high cost of new builds any more”. And fair enough, perhaps we have been running the ‘expensive materials’ line for too long.

Some things the report highlights however: land is expensive. Probably because there isn’t enough ‘infrastructured’ land available. There lots of greenfield and brownfield land available but it’s still an expense getting this to a reasonable development state. It’s Phil Twyford’s plan to flood the market with more ‘infrastructured’ land to bring prices down. Yet he’s not prepared to put up all the money to make this happen. For the foreseeable future it looks like land will continue to be the ‘largest contributor to the cost of new development’.