MBIE investigation into building products likely to resolve nothing

Lately the Housing Affordability politicking has turned its attention towards building materials – manufacturing and supply and how the industry is contributing to high prices through what appear to be significantly more expensive materials than are available overseas. The questions have led to an enquiry that seeks feedback from the industry.

Whilst the likelihood is a low turnout on submissions due to fears of being black listed by the big suppliers it is interesting that much focus is upon incentives and price fixing and what happens within the building materials industry to fix prices high, maintain that equilibrium and shit out competition.

Section 4 of the enquiry questionnaire entitled: ‘competition impact of strategic conduct in construction markets’ notes the following issue.

Issue: Lack of Transparency of Strategic Practices

‘Strategic practices such as the provision of rebates or targeted discounts have the potential to constrain access to distribution channels for building materials. The lack of transparency around their use also means the benefits that result from them are less likely to be passed to end consumers’.

What this is about is such practices as ‘cover pricing’ – the act of having a face price but offering rebates and incentives, loyalty schemes between merchants and tradespeople as well as other schemes.  

The paper suggests that a common conduct of suppliers and manufacturers is to structure discounts and benefits that are provided to tradespeople on the basis of sales of total volume. Most of these discounts and benefits are rebates or non-cash benefits like overseas trips, tickets to games, products and so on.

Offering these to builders means there is often no way to pass on the benefit to the principle of a building contract – like the mum and dad building their home.

In doing this the suppliers are ensuring that the price of materials as products are kept at their inflated rates and that loyalty is acquired from tradespeople who are less inclined to swap suppliers because their accrued benefits would be lost.

The government is keen to explore how these benefits can be made transparent. What is surprising is that they may have overlooked that this can already be achieved using the Secret Commissions Act of 1910.

Whilst it requires some further consideration from legal minds it is possible that the SCA 1910 already makes it illegal to receive benefits without declaring them and carries a 2 year jail term.

The key to whether this Act can be relied upon – to place pressure on suppliers to stop offering incentives and benefits and to start lowering prices as genuine discounted rates that can be passed onto the cost of houses – is what is the definition under case law to define commissions and whether commissions include any benefit received in return for a sale.

In short it may well be that the act of providing or receiving of such benefits without declaring them is illegal and can result in jail time.

  • BW_Lord

    Being fairly close to this issue, I wouldn’t be surprised if an investigation turns up some very dodgy dealings, especially around corruption/kickbacks in local government offices.

    There’s definitely more to this than just pricing of the materials themselves.

    • philbest

      Absolutely agree that there is massive scope for corruption in Councils. Especially over zoning of Greenfields land.

      http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10887742

    • David

      Pricing of materials is a big factor outside local government stuff, and market control by the big players, but its unlikely this commission will find anything and I doubt a 1910 law seldom used is ever going to work.
      Lets also not forget the more transparent loyalty scheme’s operating. Flybuys?. Pretty good flybuy rewards on a house lot of whb’s if you pay cash. Just a pity flybuy rewards are not worth much.

  • philbest

    The real underlying problem here is that NZ has the ultimate cottage industry in housebuilding.

    In the 1970′s, Fletcher’s built more than 1000 houses in some years and so did Neil Homes. Now Fletchers are the outliers at 300 houses per year and nobody else over 100.

    This is simply because urban planners have said “no more greenfields”. Most house construction is now “squeeze-’em-in on what was backyards”. Done one at a time by teams of 1 to 3 people. Lots of scope for productivity gains from scale, and negotiations of bulk materials supply – NOT.

    The same thing happened in Pommy-land before us due to their absolutist Green Belts and urban constraint policies since 1947.

    • David

      Not entirely correct Phil, Fletchers don’t build more than 300, maybe, but there other brands do and the 300 fletchers build is probably only in Auckland in the developments they control like Stonefields because they are all sold, not to cost plus (which is how a normal owner owned section works where they can get other prices), but to valuation which is above build cost and determined by the area. Stonefields offers Fletchers a useful profit margin.
      Outside Auckland the cost of building is more constrained by the smaller operators being competative and valuations lower but the cost of materials is not. Outside Auckland that’s the big problem.

      • philbest

        What other brands build more than 300 per year in NZ now? According to both the Productivity Commission’s Report and the NZ Initiative’s Reports on housing in NZ, Fletchers are the largest at around 300 homes per year.

        You are correct about the industry “building to valuation” depending on the area, but that is part of the problem. A lot more building happens when land prices are systemically lower. The land price curve on a graph tends to maintain its shape when forced up by regulations. More expensive fringe land equals more expensive land everywhere.

        http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10887742

        Fringe land in markets where there is no UGB tends to be anchored in true rural market prices not far from the existing fringe. This is why affordable US cities can do 1/4 acre sections for under $100,000 and completed houses for around $200,000 and often less.

        The ironic corollary to this, is cheaper land throughout the entire city – meaning that depreciated townhouses are incredibly affordable. I like to ask “planners” what there is not to like about THIS kind of “housing choice” close to the city centre:

        http://www.realtor.com/realestateandhomes-search/Houston_TX/type-condo-townhome-row-home-co-op/price-60000-100000/sby-1?pgsz=50

        • David

          GJ Gardner would be over 300 per year and probably the likes of universal, golden homes and a few others. A lot are off course still Fletchers brands and under the radar as such unless you are in the know.

          As an alternative way of thinking about housing this article on Japan may be off interest. While it’s predominantly about why tyey have some radical designs, it also gives an interesting concept on a different way to think about house values.

          http://www.archdaily.com/450212/why-japan-is-crazy-about-housing/

          And about your comment about “building to valuation” I would add that’s its not just land prices being lower that causes this, but mainly house values being higher, AND developers having control over vacant sites. That’s harder in built up areas where most sites are back of existing section type sites, or small scale which the big boys don’t like, but on the fringes it becomes attractive and if anything the Special Housing Areas will play into this more.

          • philbest

            That article on Japan is very interesting.

            But the low-regulation housing markets in the USA have some of that sort of thing too; it is just that it is not the dominant culture like in Japan. I mean the “disposable” 30-year-life “house”.

            We want choices and minimal wealth transfer via land value distortions. Look at that link to a Houston RE site I gave you. Our “planners” tell us that $800,000 townhouses near the city centre is “increased choice”. George Orwell should have written a whole book specifically devoted to urban planners.

            I think I get your point about building to valuation on greenfields, but it is not so much “developers having control over vacant sites”, as “incumbent land vendors not having an oligopoly power to hold out for $112 million for a site they bought in 1995 for $890,000….”

            The further point I am making about system-wide land affordability, is that when the land is cheap, old family homes have been knocked down and townhouses built in their place, which is what the planners think they want when they impose a UGB. And once the townhouses are a decade or 3 old, look at the price they are in the low-land-price city.

            http://www.realtor.com/realestateandhomes-search/Houston_TX/type-condo-townhome-row-home-co-op/price-60000-100000/sby-1?pgsz=50

            But in our cities, hardly anyone can afford anything “built to value” after the developer has bought the old shack on 1/8 of an acre for $1 million dollars, knocked it down and built 3 two-story townhouses, copping gouging levies and costly delays along the way.

    • Andy C

      It’s not “the” problem, but it was indeed identified as amongst the list of reasons for higher prices.

      Effectively bespoke housing is the norm, rather than bulk cookie cutter plans.

      • philbest

        “Cookie cutter” is an unnecessary scare term in the context we are discussing. Back in the 1970′s when we were building 3 to 5 times as many houses as we are now per year, only around a quarter of them were “cookie-cutter”. But the entire industry had scale economies as well as minimal land cost contribution to the final selling price.

        It is the people at the bottom of the market that get hurt the most by the status quo. Not only do we have McMansions for $650,000 when they should be $350,000; we have NO “cookie cutter” housing at $200,000. It isn’t “there at inflated prices”; it isn’t there at all.

        The same goes for all the second-hand houses on the market. Old shacks in cities with cheap land throughout, are next to nothing in price. in Dorkland, they are a million dollars because that is what the dirt they are sitting on is “worth” under the great Kiwi Ponzi scheme.

        http://www.realtor.com/realestateandhomes-search/Houston_TX/type-single-family-home/price-60000-100000/sby-1?pgsz=50

  • nzd.gbp

    What’s wrong with negotiating a discount with your supplier and keeping it for yourself? Builders have no obligation to pass these discounts on to customers. They can use it to undercut competition and secure a contract but whatever they decide to do with it, it’s theirs.

    This all takes the focus away from the real causes of high house prices: interest rates that facilitate greater levels of debt, restrictions in land supply, resource consent and red tape for builders, immigration faster than supply in houses, rates based on local govt valuations – providing an incentive to CV houses over and above their discounted rental income thus providing a nice little earner for councils.

    Interest rates are kept low until there is inflationary pressure to raise them, and by inflationary, I of course mean proxy inflation – basket price rises – not supply of money proportional to growth in the underlier of fiat money – GDP. Remove houses from the inflation indices and you have removed a large driver for the real inflation that younger people only know too well.

    This is all engineered to create a wealth effect and make people borrow and consume our way to economic prosperity but the problem is that houses have always only been houses. We haven’t improved them for many decades now. They are not new technology. They therefore can only be worth more in nominal terms. This nominal increase in growth then get’s refinanced for consumption.

    How can houses be worth proportionally more than they used to be unless this is an engineered result? And to who’s benefit?

    And why haven’t we imprisoned all those council building inspectors who signed off all those leaky homes and then passed the cost on to taxpayers – after builders had to pay the inspection fee I might add?

    • Andy C

      “What’s wrong with negotiating a discount with your supplier and keeping it for yourself?”

      Let me answer your question with another. Whats wrong with a monopoly? Most developed economies, even capitalist ones, have laws regulating monopoly pricing.

      Yet we could apply a similar argument to the one you did for monopolies.

      • nzd.gbp

        there’s plenty wrong with a monopoly – if it’s not yours. But we aren’t talking about monopolys here. we’re talking about negotiating a discount from your suppliers. You can become a builder fairly easily and share the fun.

        • Andy C

          I think I didn’t make myself clear NZD.

          The monopoly example was meant to point out that we could apply similar arguments to yours to justify not needing monopoly regulation. Yet we still have the regulation, and it is considered necessary.

          I’m trying to say that your argument has consequences, and in many developed economies those consequences have been deemed detrimental enough to abandon.

          • nzd.gbp

            that’s not enough for me to go on I’m afraid. We are not talking about monopolys so I don’t know why you are applying anti-monopoly laws to this case. Are you saying that a business’
            ability to negotiate a better deal for themselves should then be taken from them and shared around their competitors in case they are the only ones who can negotiate these terms? It’s unfair to their competitors that they can get better terms and therefore to society as a whole?

    • philbest

      “…..This all takes the focus away from the real causes of high house prices….”

      I agree. The cost of materials would soon come right if we had anyone able to do volumes on greenfields.

      NZ should be exporting kitset manufactured homes like Canadian builders do – they get heaps of orders every time there is a natural disaster somewhere in the world that wipes out houses. but NZ has not had the local market structure to develop “production” housing, for years now.

      • Andy C

        “The cost of materials would soon come right…”

        Unless there was some economic force that prevented it. Such as incentives which are not directed at the players incurring the cost.

        This was the crux of their observation.

        • nzd.gbp

          by players incurring the cost, you mean the customers?

          • Andy C

            The house purchasers

          • nzd.gbp

            no one’s forcing them to buy houses at the price they do

          • Andy C

            Welcome to the monopoly regulation argument, nice to have you on board :)

          • nzd.gbp

            pardon?

          • philbest

            Andy, this is a simple question of whether any market is a genuinely competitive one in which people get to buy things with “consumer surplus” in them, or whether there is “economic rent” in them – that is, they are forced to pay what they can stand to get the said item, instead of suppliers taking what they can get in competition with others who can get the product to market for a lot LESS that what people would pay for it if they HAD to.

            We wouldn’t stand for this in food and we shouldn’t stand for it in housing either.

    • HtD

      Spot on in the main, but I 95% disagree about the council inspectors. They were faced with inadequate site inspection time, inadequate training about new materials, fashion for stupid, inappropriate designs, reluctance of owners/developers to pay a supervisor and a reduced skilled workforce after the abolition of the Ministry of Works. The legislation said they HAD TO accept ‘reasonable evidence’ of product suitability and workmanship. ‘Reasonable evidence’ included BRANZ certification of products, and warranties and producer statements from contractors/installers (who then vanished). In short, the Government were responsible and have dumped the problem on the councils.

      • nzd.gbp

        The problem wasn’t dumped onto councils. The problem created employment for councils. The problem was dumped onto taxpayers. Housing quality is too important to be left to councils or government. Getting signed off by an inspector meant shoddy builders could point the finger when in fact they should incur the cost of poor workmanship.

        • HtD

          Councils were funding 30 to 80% of remediation costs awarded until the fairly recent FAP scheme, though in my view they were only 10% responsible.
          The builders/developers tend to be able to walk away because they have liquidated their limited company and the Council have to stump up because they are the ‘last man standing.’ Google “joint and several liability” if you want more explanation.
          I was referring to the problem of finding the money to fix the defects.
          In my experience, )and I have a lot because I am involved in sorting this mess professionally) – the worst culprits for signing off shoddy work were the private certifiers.

          • philbest

            The whole thing should be turned over to the Insurance industry. They insure the builders (public liability), they insure the houses; they should do the inspections and sign-offs too. The Councils have no skin in the game; at least it is the taxpayers skin, not theirs.

          • HtD

            I agree about insurance schemes, But (prior to FAP) it’s the ratepayers in the councils area who pays, not the taxpayer.

  • 4077th

    An enquiry into the basic science of supply and demand. Another clever use of taxpayer money. Well done MBIE!

  • Mr_Blobby

    Given we grow the trees here you have to wonder.

    The investigation wont turn up anything, the corruption runs to deep. Everybody who is anybody will have their fingers in the cookie jar. Councils are also having a huge drink at the trough.

    To few players, to many vested interests. I smell white wash.

  • rockape

    Where does incentive end and bribery start?

  • rockape

    As a Pomm I wonder about the need for 3 beds on a quarter acre. I lived for many years in terraced houses, having started life in a tenemant flat in Glasgow they seemed fine. Heating cost less victorian terraces were roomy, with high ceilings, the old 17th century workers cottage with low ceilings and small rooms was very efficient. After I lived on board a yacht for 9 years a house seemed far too roomey, what did the two of us need those 2 extra bedrooms for, why was the kitchen so big when i could reach everything in my galley without moving my feet. Social housing in particular should be small enough to live in as efficiently as possible. Thats the way you can build for 300k learn fron the victorians, they made us as wealthy as we now are.

    • philbest

      What the Poms “choose” is merely a matter of where the prices of the choices have ended up after decades of interference in the market by town planners. Here is a basic principle to tell whether a particular size of housing is undersupplied relative to true demand or not. In most housing markets, the land that higher density housing is on, is worth more per square foot. Each housing unit is cheaper than a larger house and section, but this is because the trade-off has been made in size. In some US cities it has been said that the price of land is so much higher for the high density housing, that this shows a true under-supply of high density housing. (You have to net out the cost of development and services of course).

      But in Pommie-land, it is the land that the rare LARGE-section family home is sitting on, that is worth the MOST per square foot; the price of the “house plus land” is contributed to MORE by the land than the average, not LESS. This indicates a grossly suppressed market supply response to true demand for such homes.

      It is kind of like saying we should learn from the Vietnamese and ride motorcycles instead of driving cars, because 80% of travel in Vietnam is by motorcycle and it is actually quite fun, you know.

  • Dave

    one of the biggest hurdles to building costs in NZ, is the scale (small) of the industry meaning its simply inefficient compared to larger countries, and the cost of transporting raw and finished products is horrific. If you really want to see where the margins are, look into the supply chain, the merchants strangle the bejesus out of the manufacturers, they (the merchants) are very inefficient and make unreasonable profit margins, manufacturer rebates, conference/entertainment contributions, advertising / marketing contributions, ullage allowances etc. Once there is an alternate and efficient supply chain without the merchants (M10, Bunnings, Carters ITM and Placemakers) their spoils can be used to reduce costs and competition between builders will ensure the lower prices are passed on to the competition. (probably 10-20% of the material cost of a new home). (Getting RID of COuncil costs could drop another 25 to 50K off new homes)

    However, a rider, most of the construction firms lack the capital needed to really build in volume, and get credit from the manufacturers, the industry would need a serious reorganization. This is intended for the major components, timber, steel, plaster board, insulation, roofing, doors, concrete.

    1) cut out middle men where possibly.
    2) Progress payments split to suppliers (in trust) and balance to builder.
    3) Orders in JOB lots, means the builders need to be far more disciplined.
    4) Builders would need a mini supply chain

    Lots more opportunity, but the Merchants are getting very good money in return for an outdated supply chain.

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