Rankled ratepayers over building blowout

If I was an Auckland ratepayer this would rankle – the move to an office tower, claimed to save ratepayers millions over ten years, is going to cost the ratepayers more millions to repair.

NZ Herald: $31m to clad Auckland Council’s HQ

Ratepayers have already paid $128.5m to buy and fit out the 25-year-old building, described as robust and structurally sound with good bones when it was bought in 2012.

About $4m was set aside for stonework issues picked up during due diligence.

But…

The cost of cladding repairs at Auckland Council’s Albert St headquarters has blown out from $4 million to an estimated $31m, according to a confidential report.

Two sources yesterday confirmed the estimated $31m repair bill. Council staff would not confirm the figure.

The $27m increase in cost is the same figure senior council officers said would save ratepayers over 10 years moving from a mix of rented and owned CBD accommodation to the ASB Tower.

An estimate of $4m blowing out to an estimate of $31 million is horrendous.

The ‘due diligence’ does not appear to have been very diligent.

Home Owners & Buyers Association president John Gray said the $31m cost was in line with his experience of recladding large buildings.

He said the cost could rise once the cladding came off.

Building work could take more than two years, he said, and staff may have to vacate the tower. About 2080 council staff work in the building.

If Gray thinks the new estimate is in line with his experience how experienced were those suggesting a cost of $4m?

I expect their will be some rankled ratepayers in Auckland. And it could get worse.

That a 25 year old building should require major recladding work should also raise a few eyebrows in building and property circles.

Building industry investigation

TV3’s 3d have done an investigation into price rorting in the building industry. We certainly seem to have higher building costs than Australia, and this is on top of our land costs and cost of burearacracy.

Are we paying too much to build our homes?

A 3D investigation has uncovered a whole range of practices in the building industry keeping New Zealand prices high, from perk trips for builders to exclusive stocking deals at hardware chains.

Kiwis are paying so much for building materials – the building blocks like timber, concrete and plaster – contributing to ballooning costs.

Tony Sewall, head of Ngai Tahu Property, the biggest developer in the South Island, has sent teams around the world to investigate building material prices.

“We’d be paying around 30 percent more than in Australia, probably 60 percent more than the United States,” he says. “And the United States’ product is better.”

The latest Quotable Value statistics tell us $280,000 to $312,000 will build you a medium home in New Zealand. In Australia it’s much cheaper – an equivalent house will set you back $260,000 to $280,000.

That’s just the house building costs.

“We need to open up the New Zealand market to the international one,” says Mr Sewall. “If there’s a product that’s being used on a building here, the builder should have choice from all around the world. That will keep the competitive tension up and keep the pricing at the right level.”

Bunnings New Zealand blames transport costs and our small population, but there’s a myriad of things industry insiders say are pushing up prices.

There are exclusive deals between some suppliers and big hardware chains to stock only one brand of product, so there’s no choice for the consumer. And then there are also kickbacks and rebates – rewards designed to keep builders loyal to a particular type of product.

So claims there are anti-competitive practices in the industry. A specific example was given:

When it came time for the Government to decide who would supply plasterboard to the Christchurch rebuild, the contract went to Gib and a major German firm, Knauf. The Government said it would help improve competition.

But within a year, the German company ran into problems. There were resignations and the company announced it was reviewing its New Zealand operations. The world’s second biggest supplier of plasterboard simply couldn’t gain traction in a market dominated by Fletcher Building.

In fact, Fletcher’s share of the New Zealand plasterboard market is 94 percent. After several complaints, including from Knauf, the Commerce Commission investigated.

It found evidence of aggressive market behaviour, but no illegal, anti-competitive practice.

But official MBIE briefing notes for the Commerce Minister from February this year, well after the Commerce Commission’s decision, warn the building sector could be susceptible to cartel-like behaviour and that aggressive market tactics do “curtail competition in the supply of alternative wallboard”.

It went on to say the “comparatively high cost of wallboard in New Zealand is having an impact on the cost of construction”.

Big business monopolies and duopolies can be bad for competitive pricing.

The journalist who investigated for that report, Michael Morah, has also posted an opinion piece. Opinion: Govt action needed on building industry. He concludes:

Considering these issues have the potential to affect thousands of ordinary Kiwis, you’d think it was something one of our politicians or policymakers would front up to talk about.

To be fair, the Government did appear to take action last year in an effort to improve competition. What it did was cut tariffs or taxes on some imported products, the idea being that we’d get a lot more international products into the market for less and it would push prices down.

Unfortunately, however, this move hasn’t had much of an impact and the Government knows it. In fact, it was told the perceived benefits didn’t stack up.

Official Cabinet papers 3D has obtained reveal the behind-the-scenes decision-making process when the cut on tariffs was about to be introduced. The documents show the Ministry of Foreign Affairs (MFAT) advised Housing Minister Nick Smith that any competition gains from a tariff suspension would be “limited”, and that in any event, the impact of these taxes on the price of residential construction was “marginal”. Despite this, the Government went ahead with the rule change.

On the rebate and loyalty issue, the Government effectively decided it was all too hard and left it alone. But in my view there must be greater transparency and accountability.

Consumers rely on builders, architects and draftsmen to make calls about what materials they use. The problem with this, as we discovered in our 3D Investigates story, is that there’s often a cash deal or a perk helping shape opinions and key decisions – this as MBIE officials pointed out in briefing notes on the issue can be used “to reinforce market power”. It appears this is exactly what’s happening currently across a range of products.

Whether the Government will do anything further to promote greater innovation and competition in the industry remains to be seen. MBIE to its credit does sound genuinely interested in improving the status quo.

But in the meantime, if you’re getting some work done on your house, considering building your own home, or purchasing some materials at your favorite DIY store, don’t forget to ask some questions. And if you’re not satisfied, go online and Google some alternative brands or products. You might find you’ll make some significant savings.