Fix spec building to make Auckland affordable again

SHOULD AUCKLAND BUILD OUT? Should Auckland build up?

“Sprawl” or intensification?

The new Auckland Unitary Plan, the way planners have decided we must live, plumps for the latter and all but bans the former.

Opponents like Nick Smith reckons we must build out, and castigates planners who promote increasing the density of the existing city.

They’re both wrong, yet they’re both right. As I’ve said before, Auckland should do both. Basically, it should allow people to do both: to live as and where they choose to, and can afford. (Choice! Fancy that!)

The key to making Auckland liveable is to make it affordable—a fairly complicated and heavily politicised subject, so let’s try to make it simple: we won’t have an affordable Auckland until the model for “spec” building  is viable once again.

Spec building being “speculative” building—a builder buying land, building a house and “speculating” he can sell it to a buyer for a reasonable profit. This is how the vast majority of NZ’s cities have been built, by small builders hoping to make a modest profit.

But in recent years this model has broken. A simple back-of-the-envelope analysis demonstrates why.

The median house price in Auckland is expensive enough, at $562,000 (up from $318,000 in 2004).
But the median section price in Auckland is $308,000, which the back of your envelope will show that leaves a gap of just $254,000 for the median spec builder to put up a house and landscaping, and get himself back a small margin for his efforts.

This is the magic gap where the spec builder looks to make his money. And this is why spec builders have stopped building the median home—because no-one can do it for that price of just $254,000. Who can do that when the median square-metre price to build the median 210 square-metre home is around $1650 to $1800 per square metre?  Look at the back of your envelope now and you’ll see that median house costing the median builder $346,500 to $420,000. There’s no chance in this Auckland any builder is going to throw money away like that.
Even with the overheated housing market, there’s just no money in it for the small spec builder unless he can really pick the eyes out of an opportunity.

Even the large house builders struggle to meet the model.  The top seven large house builders (in order: GJ Gardner, Stonewood Homes, Mike Greer Homes, Golden Homes, Fletcher Residential and Jennian Homes) between them built 1,965 homes last year (hardly anywhere near the 13,000 houses needed every year in Auckland alone) at a build price between $267,581 for an average 227 square-metre Fletcher Building home to $319,513 for an average 208 square-metre Stonewood Homes home.
Not one of the multiple-house builders could manage to make a profit as a spec builder on your median home either.

Which is why no spec builder is trying to. If spec builders are anywhere in the market now, it’s in the upper part of the market where higher selling prices make it much more likely there’ll be a margin for him at the end of the day.

THE PROBLEM IS THAT even while housing costs have skyrocketed, both land and building costs have skyrocketed. 

From 2002 to 2007, during which time central bankers around the world were injecting rocket fuel into the world’s housing markets,  material costs increased by twenty-five percent and labour costs by fifty percent (much of that due to the green-and gold-plated new building regs). Over that same time council’s consent fees increased by fifty percent, land costs doubled (and land is more than half the cost of a house), and levies and compulsory contributions levied by council increased by ten times!

During those five years, people borrowing to join the exploding housing market could afford (or thought they could) the rising prices. Few cared to notice the trend that was being masked by exploding house prices: that all the costs to build a house were going up like a rocket. Now, when the trend continues, is impossible to ignore, but few care to do much about it.

The cost of building is increasing as fast as legislators issue new gold-plated building regulations.

The cost of council delays, consent fees and levies continues to increase.

The availability of land on which to build affordably dwindles.

Politicians talk about changing things.  But the talk am0unts to nothing unless they can fix the model by which the humble spec builder used to make his money.

Because until they do, those houses the spec builders would have built will remain un-built.

And our city will remain unaffordable.

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* House and land figures from REINZ. Building prices from Rawlinson’s 2012 NZ Construction Handbook. Large builder numbers from What’s On Report.