Frank Newman: The cost of building a home

The headlines are relentless about homelessness and the cost of housing. Nowadays $2,500 a square metre is not unusual even for a relatively straight forward build. Building something unique (bespoke) will cost substantially more, +$3,500m2. Given the average home is about 200m2, the building cost alone is likely to be +$500k (plus land cost). So why does it cost so much to build a house?

There are many reasons, but mostly the cause ends up at the doorstep of local and central government.

Local council fees. Council charges have increased substantially since the Local Government Act gave them the ability to charge development levies. The theory was that the levy would shift the cost of providing roading, water and other new infrastructure from ratepayers generally to developers. But that is not the practice. The actual cost varies by council and the location of the development but may run into many tens of thousands of dollars; $30k would not be unusual.

On top of that there are the council’s other fees - building levies, inspection costs, and so on. All up, that means that on a $400k home, local council fees may add another 10% to the cost. Those are costs to the developer which are then recovered through higher land and building prices.

The development levies are a fixed cost and therefore much more significant in percentage terms for small homes. One would have thought councils would be doing their utmost to make it easier for those wanting to live in small or tiny temporary homes, but not so. For example, the Christchurch City Council is planning to extend the definition of a residential unit to include, "any vehicle, tent, marquee, shipping container, caravan or boat used as a 'residential unit' or place of business or storage as a building", in order to catch these occupants within the council’s regulatory (and revenue gathering) net. One couple said the effect would be to double the cost of their temporary home.

Local council planning rules. It is now widely accepted that limiting urban boundaries (the so called “Smart Growth” advocated by greenies and council staff) has encouraged land-banking and increased the price of land. Such is the problem in Auckland that central government has introduced Housing Accords and Special Housing Areas to get the job done. But this issue is not only restricted to Auckland. Councillors throughout New Zealand have not had the courage to take control of their planning department and stand up to media savvy environmental activists.

The Resource Management Act (RMA). In 1991 the RMA was heralded by the politicians of the day as a visionary piece of legislation. In reality, it has been an utter disaster and significantly contributed to housing shortages and increased housing costs. While the Act has been amended more than twenty times, the fundamental problems remain. These include defining affected parties, the "compensation" needed to appease those who object, and the costs and delays of the hearing process. Those costs may run into hundreds of thousands of dollars should the consent be publicly notified (which is commonplace given councils are now more restrictive about permitted activities) and end up in the Environment Court.

An example involves a scruffy piece of land on the Tutukaka Coast. The 6.6 hectares (16 acres) had been a forestry block that backed onto a coastal settlement. The land was bought with the intention of rezoning it from Coastal Countryside to Living and dividing it into 24 sections. A substantial area was to be set aside as a reserve for native revegetation, and included covenants preventing residents for owning dogs and cats. The consent process took six years, ended up in the Environment Court, and cost $1.4m (significantly more than the land cost). In the end, the consent was declined because the judge decided extending the living environment was contrary to the council’s district plan, which was following the Smart Growth mantra - and that there was a possibility that the residents’ visitors may bring pets  which might run off and decimate the local Kiwi!

Had the subdivision been approved, the resource consent costs alone would have added$60,000 to each section! As it happens $1.4m went into the pockets of the RMA hangers-on, and 24 new sections and millions of dollars worth of new housing were lost to the area.

Unfortunately this experience is all too typical. The RMA is an industry built around a complex web of rules and regulation, perpetuated by those who profit from it: councils, planners, commissioners, lawyers, judges, iwi, activists, experts writing voluminous reports on largely immaterial issues, and others. Each is in there extracting a pint of blood, a pound of flesh, or advancing their cause at the expense of those brave or foolish enough to propose a development.

Doing anything that involves the RMA and a local council consent is a gamble. There is a high probability that things will go wrong and cost money. A rational business person faced with those risks will only proceed with a project when the returns justify those speculative risks. That limits the supply of new sections and ensures that what is created comes at a price that includes the developer’s risk premium - in other words, an investment return of say 50% instead of 20%.

In addition to the significant upfront costs of a development, a developer has holding costs which form part of the eventual sale price of the development. Here's an example, with  three assumptions:

1. An investor needs to make say 20% p.a. on their investment to make it worthwhile,
2. The all up cost to develop a section is $100,000, and
3. The time between buying and selling the section is one year.

Under that scenario the developer would price the section at $120,000. If the third assumption is changed from one to 10 years, then they would have to sell the section at $300,000 to achieve the same annual return! In other words, protracting the consenting time from one to ten years has added $180,000 to the cost of a section. If you think 10 years is extreme, planning for the Long Bay residential project in Auckland began in 1998 but work did not start until 2011.

Why does it take so long to obtain consent? A number of reasons:

1. Greenies hold up the process to block development. It is absurd to consider that someone  living hundreds of kilometres from the subject property is treated as an affected party with full objection rights.

2. Iwi need to be consulted, even when there are no sites of significance to Maori on the land. Sometimes multiple iwi  are deemed to be affected, each providing their own cultural assessment report (paid for by the applicant), which may require certain conditions to be met, most of which involve payments by the developer to the iwi.

3. Council staff take a precautionary approach. They require endless reports from experts, usually to protect their own backsides, but in some cases they require further expert reports because they do not agree with the earlier reports.

4. The court process itself is often long and complex.

All of these reports and consultations cost money and take time, and the costs become part of the development cost which is passed onto the homebuyer.

It's because of the significant delays arising from the RMA that the government introduced special housing zones in Auckland, to reduce the average time for obtaining a resource consent from three to five years to just a few weeks. That in itself is an admission that the RMA is failing, yet substantial reform of the Act has never taken place.

Building sector regulation. The leaky building disaster prompted central government to impose much more regulation. While this has certainly improved the quality of the homes being built it has also added to building costs. Labour costs in particular have increased substantially since the Licensed Building Practitioners (LPB) scheme came into effect and created a restricted trade. Health and Safety regulations too are much tighter since amendments came into effect in 2012 to reduce the number of fall-related injuries. This is estimated to have added about $10,000 to the cost of an average home. Construction firms now have much more stringent work place safety regimes to follow, including additional costs in the form of workplace safety plans etc, which add to their cost structure and need to be recovered from the consumer.

Tax. New house builds include GST. As a result, a $400,000 house costs $460,000, and there is a direct transfer of wealth of $60k from the household to central government. Increasing the GST rate from 12.5% to 15% added $10,000 to the cost of an average home. It is surprising that those campaigning to remove GST from food, have not mentioned housing.

All of these factors add substantial costs to housing and land packages, making them unaffordable to those on low incomes. If central government is really serious about reducing housing costs it needs to address the severe failings of the RMA and revoke the charging of development levies. Those two changes alone would result in reduced upfront costs and faster processing of subdivision applications.

The government know what the issues are, but seem to lack the courage to do what's necessary to get ahead of the game.