The Government hopes a Commerce Commission investigation into building supplies will bring house prices down. But submitters wonder whether the market study is even asking the right questions.
The Commerce Commission’s probe into competition in residential building materials moves one step further this week. Cross-submissions - submissions on the submissions on the preliminary issues paper - close on March 16.
Everyone agrees with the overarching remit behind the study - ensuring New Zealanders aren’t paying too much for their homes.
But whether the study as it’s set up at the moment will actually achieve that isn’t clear. In particular, many of the 25 submitters argue the narrowness of the terms of reference of the study means the biggest causes of problems with building supplies won’t be addressed at all.
The building materials market study - the third in the Government’s series after petrol and supermarkets - was a pre-2020 election promise launched in November last year by Commerce and Consumer Affairs Minister David Clark in November.
The goal is to find out whether a lack of competition in building supplies means New Zealanders are paying too much for their GIB board and insulation, their framing timber and roofing materials.
And if so, why.
“Understanding any market barriers could play a key role in supporting New Zealanders to achieve home ownership, so I’m pleased the Commerce Commission will be getting this work underway,” Clark said at the time.
There were 25 submissions to the ComCom's preliminary issues paper, mostly from industry players; three were from self-styled 'monopoly buster' Tex Edwards, founder of rival telecommunications company 2Degrees and active in the push for a third supermarket chain.
His three submissions come from Monopoly Watch NZ, social housing startup Kiwi Infrastructure, and 'Mike and Tex' - a joint submission with home builder Mike Greer.
Almost all 25 submissions call for the scope of the ComCom investigation to be widened in some way - though not always in the same way.
The Property Council’s submission is typical of many.
The high-level summary of the construction process was “over simplified”, the council said, and there was no reason to exclude steel and steel reinforcing materials.
“If the study is wanting to get closer to solving housing affordability in New Zealand, then expanding the scope to include the most relevant building supplies would be beneficial.”
Meanwhile, “there are a range of issues outside the scope of the study that have major impacts on demand for building supplies and the supply chain process” that the commission should look at, Property Council chief executive Leonie Freeman said.
These include high shipping costs, the lack of productivity, capacity issues and funding/financing for projects.
The Property Council was one of several submitters that put local councils, and their aversion to risk, at the heart of a lack of innovation when it comes to building materials.
The disastrous leaky building and other issues of the 1990s and early 2000s were in part a result of using the wrong building materials, and often left councils the ‘last man standing’ as developers and builders bailed. Ratepayers forked out millions of dollars to fix the problems and as a result councils closed their doors to innovation.
“Councils fearing joint and several liability guard against the downside risk of less familiar materials; they see none of the upside benefit,” New Zealand Initiative chief economist Eric Crampton said in his submission.
“Council risk aversion, caused by liability rules, creates a regulatory barrier to entry against novel building materials unless those materials provide a very substantial advantage over existing materials in large-scale developments.”
At the same time, architects and engineers, knowing it will be harder to get council building consent if they use unknown products, stick to familiar materials used in familiar ways, Crampton says.
“Easing formal regulatory constraints and informal consenting barriers is critical.”
Barriers to entry to imports
Crampton wonders if the issue with any lack of competition in the New Zealand market wouldn’t be addressed more simply by making it easier to import building materials from overseas.
“The Commission asks a series of questions about vertical arrangements within the construction industry and building material supply system. The commission should also ask whether any of those questions would be relevant if it were simple for someone to show up in Auckland Harbour with a containership filled with building materials that meet the relevant Canadian, American, British, Japanese or Australian standards and to start building.
“The commission may recall that, when parallel importation began, The Warehouse was able to simply route around a whole host of complex tying arrangements – to the benefit of consumers. Nobody needed to assess each of those prior arrangements.
“Imagine, for sake of argument, that the most anti-competitive explanation for all rebate and loyalty programmes, exclusivity arrangements, and vertical integration were the true explanation. Could any of those matter if buildings and materials could be parallel imported? If New Zealand made it simple to build houses and apartments that met Vancouver’s code, or Tokyo’s code, or Seattle’s code, by recognising materials fit for use there were good enough for use here, we could, in effect, parallel import buildings.”
Retailers Bunnings and Mitre 10 make similar points in their submissions - that the main hurdle for bringing potentially cheaper products into the New Zealand market is more to do with local regulation than anti-competitive practices at home.
“There are high barriers to entry in building supplies generally, which affect suppliers of new and innovative products,” Mitre 10 said in its submission.
'No meaningful difference' to housing costs
Fletcher Building, one of the companies most under the gun from the Commerce Commission inquiry - it owns retail chain PlaceMakers and its subsidiary Winstone Wallboards has a very significant share of the GIB board and insulation systems markets - argues the scope of the ComCom study is too narrow to make a meaningful difference to the cost of housing.
Fletcher chief executive Ross Taylor argues building materials make up less than 20 percent of the total cost of a typical two-storey house in Auckland. The rest comes from things like land, labour, consenting and taxes.
Meanwhile, excluding the cost and supply of steel, plumbing supplies, electrical materials, kitchen fittings, paint and carpet from the scope of the market study reduces the potential impact on the price of a home even more - to nearer 8 percent, Taylor says.
“If the underlying policy concern is the cost of building a house, it is difficult to understand why only four of the top 10 and only eight of the top 20 building supplies [from the Deloitte list] are considered potentially in scope,” Taylor says.
NZ Initiative’s Eric Crampton doesn’t mince his words when it comes to questioning where the Government’s priorities - and taxpayer money - would be best directed.
“The commission could spend all of the coming year exploring vertical separation of material retailers, builders, and material manufacturers; estimating profit margins in any of those businesses and deciding whether they are high relative to overseas competitors; arguing with existing businesses about how the Commission has failed to account for differences affecting weighted cost of capital and profit margins here as compared to abroad, and tying up critical staff in each of those companies for months when they should be helping to get more houses built.
“Or, it could spend the coming year delving deeply into the regulatory and consenting constraints that may together form a substantial barrier to entry. It could make recommendations that would enable far stronger competition from overseas material suppliers and developers. And it could thereby help open the market so better houses could be built more cost-effectively.”
The deadline for the commission to deliver the final report is December 6.
