Fixing housing crisis depends on breaking building supplies deadlock

Dr Eric Crampton
18 January, 2022

Dear Commerce Commission. Why can’t I parallel import a house, one piece at a time?

The Labour government’s urban growth agenda has started picking up steam, easing zoning to allow a lot more building. As more zoned land becomes available, building material costs will matter more than they have for the past decade.

The government picked the right time for a Commerce Commission study of the market for building materials.

The Commission needs to get this one right. Getting it right means starting with the right question. And the right question here is the same question that should have led the Commission’s recent study of competition in grocery retail.

If there are enormous profits to be had in supplying building materials, or groceries, to the New Zealand market, why has no new entrant shown up to eat the incumbents’ lunch? Do potential new suppliers just not care much about profits?

In groceries, the Commission pointed to zoning and consenting conditions that could, all on their own, completely frustrate any new entrant.

Imagine a foreign supermarket chain considering entering the New Zealand market. It would need to find a suitable set of sites across the country. Few sites are zoned for larger footprint retail and many of those sites are encumbered by land title covenants forbidding grocery retail. Consenting decisions could take anywhere from months to a decade or more and sometimes seem designed to thwart competition. The Overseas Investment Office provides its own set of delays and uncertainties.

Stronger competition in grocery retail requires substantial reform to zoning, consenting processes, and the Overseas Investment Act.

Building materials supply seems like it should be far easier, at least in principle.

If a construction company thinks that gib, or insulation, or nails, or any other building material is terrible value for money in New Zealand, there seems to be a simple solution.

During the import licensing era, Alan Gibbs urged JVC to disassemble perfectly functional televisions at the end of their assembly line so they could ship him the parts for reassembly in New Zealand. He undercut local suppliers while providing a better product. Could something similar be done with houses abroad, ideally before all the pieces were put together? Houses could be parallel imported, one piece at a time.

The developer able to do that would have a substantial advantage over others, if local building material costs really are out of line. And nobody has ever accused developers of not wanting profits.

If building material costs really are far higher here than they should be, why aren’t developers bringing in shiploads of building materials and ignoring local suppliers? Covid cannot be the answer; complaints about building material costs long predate the pandemic.

Framing the question properly would help the Commission decide where to focus its efforts. Imagine for the moment that there were some nightmare cartel arrangement among local building materials suppliers. Could it possibly matter if anyone could easily parallel import a few container ships of insulation and gib from Vancouver, or full kitset houses?

Tech evangelists liked to say that the early Internet treated censorship as damage and routed around the problem. Parallel importation similarly lets anyone route around whatever local cartels might exist. Would-be cartels cannot have much bite if anyone can simply route around them.

So why have we not seen it?

The Commission’s Preliminary Issues Paper points to some potential answers, but too often in ways that beg the question.

The Commission notes vertical integration between developers, building material suppliers, and building material retailers. A developer might be reluctant to purchase outside of the corporate family. But if that were the case, a less constrained developer could outcompete the constrained integrated behemoth. And there would be an enormous opportunity for anyone to build a giant warehouse on the edge of town, stock it with cut-price but first-rate materials from trusted places like Vancouver, Seattle, or Tokyo, and supply local tradies.

The Commission suggests Kiwi houses use bespoke window sizes not suited to mass-produced, high-quality overseas products. But that too would provide an opportunity for a developer able to design houses to meet those standard sizes. That developer could sell houses with solid and efficient triple-glazed windows instead of Kiwi-standard custom-sized condensation-attracting thin pieces of glass in easily twisted cheap aluminium frames.

According to the Commission, engineers and architects often specify New Zealand materials in the building plans, providing the builder with little option. But if overseas materials were of higher quality and lower cost, developers would choose architects and engineers whose plans that did not result in overpriced wooden tents.

Earthquake readiness may matter. But is it really plausible that materials built to withstand earthquakes in Japan are not good enough for New Zealand? Vancouver sits on the ocean, faces substantial seismic risk, and has already gone through its own leaky building saga. Their climate is similar to ours. Houses good enough for Vancouver will be good enough for Kiwis.

If local materials really are overpriced, profitable opportunities are being missed either by existing players, or by potential new entrants - unless some other barrier must be at play.

The Commission needs to find out just what it is.

Liability rules facing councils are a far too plausible possibility.

Suppose a developer went to Vancouver, filled several container ships with all of the materials necessary to build apartments, townhouses, or stand-alone homes, and sailed back again.

What would it take for the developer to be allowed to use those parts to build homes?

Normally, building materials must meet BRANZ certification. Certifying each of the thousands of components necessary for building a home would cost millions of dollars, and the certification process brings uncertainty.

That cost may be surmountable for a developer planning to put up a lot of homes.

But council still needs to sign off on the plans and to provide final approval of the building.

Councils can be very risk averse.

The reason is simple. Legal liability rules mean that councils can be on the hook if anything goes wrong.

Liability for building failure is shared jointly and severally among builders, subcontractors, and the council that signs off on the building.

There is some logic behind joint and several liability among builders and subcontractors. Unpicking which subcontractor’s error caused a problem that showed up a decade later would be tough, and many will have ceased trading in that time. Joint and several liability means the lead needs to be careful in choosing subcontractors.

Councils are caught under the same umbrella. And that is a dangerous place for a council. If the developer behind a few apartment buildings has disappeared, and faults in the buildings only become apparent later, council can be liable.

In a sensible system, council would only be responsible if it were grossly negligent. Or it would only be liable for its proportionate share of any failure. Under joint and several liability, council can be left holding the whole bag.

The problem is hardly secret. Auckland Council, in 2019, urged the government to leave councils only proportionately liable for building defects. Joint and several liability remains in place.

The incentives provided under liability rules mean councils will be very reluctant to allow anything unfamiliar. Council takes on far too much of the downside risk and sees none of the upside benefit. It is a recipe for risk-averse building approval processes.

So good luck to the developer who brings in shiploads of house parts from Vancouver to route around any problems in local markets.

And even greater luck to the rest of us if our competition authority spends its limited resources trying to break up existing supply chain arrangements.

The Commission noted an awful lot of strains on the current system – greater demand for building materials, pandemic effects on supply chains, and shifts in consumer demand toward lower-carbon building solutions.

Making it easier to parallel import building materials from the wider world provides flexibility and resilience against whatever changes might come.

The Commission’s study is timely. Let us hope that the Commission focuses on the right question. The success of the urban growth agenda may depend on it.



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