Article: Property Investment

The Science Fiction Of  Pre-Fab’ Homes with Frank NewmanThe Science Fiction Of Pre-Fab’ Homes with Frank Newman

How unsurprising it is to have a new Minister of Housing who says he has the answer to our housing shortage. The solution, he claims, is factory built prefabricated housing.

Minister Phil Twyford told the gathering at the PrefabNZ’s annual conference, “This is not some science fiction dream. We can do this, if we have a bit of backbone and pursue the right policies”. He continued, “KiwiBuild using mass procurement gives us the opportunity to build at scale, with contract work at volume, and with the certainty of multi-year contracts, which will allow firms to invest in the technology, the production processes, and design, and business models, that will transform your industry.

Perhaps it was a case of the Minister saying what his audience wanted to hear. I agree with the Minister that if housing is to be more affordable it will require “a bit of backbone” and “the right policies”, and I agree that prefabricated housing may go some way to reducing housing costs.

However, I do not share the Minister’s view that this is the solution and I doubt that the new government has the backbone to pursue the policies required to bring about a significant reduction in housing costs.

The causes of our high housing costs are now so entrenched that change would need to be revolutionary. It would need to reverse the huge increase in red tape that National introduced during its nine years in government and it would need to abandon the Resource Management Act which has choked development. Neither of those things is likely to happen, so don’t expect the housing shortfall to be corrected anytime soon, unless it’s due to some other factor like a significant reversal in immigration numbers.

The reality is that building is expensive. According to it costs about $3,000 per square metre to build a 150 m2 single story home on a flat section with a “medium” quality of fit out. That’s $450,000, before GST. The government’s tax take would be worth another $67,500, which takes the cost to $3,450 m2.

Going for a high quality of fit out (custom made kitchen, quality bathrooms, etc) will add another $1,000-$1,500 m2 (plus GST).

Given most people nowadays tend to have homes of about 200 m2, the building cost will set them back about $862,500 ($750,000 plus GST).

Then there is the section price. Thanks to the Resource Management Act the average new section costs is in the order of $250,000 to $300,000. Most of the development cost is in the holding costs incurred while dealing with the bureaucracy involved in gaining consent.

The Minister seems to think pre-fabricated housing is the future. Truth is, there are lots of companies doing it now - building basic houses in a factory and transporting them in a near finished state to a site. For example, the largest home a local pre-fab’ company makes is about 100 m2. It costs $2,400 m2.

Not included in that cost, however, is: interior and exterior painting, floor coverings, hot water cylinder, plumbing and tapware, spouting, water supply, septic tank or connections to council system, electrical metre board, phone, whiteware, curtains/blinds, decks and verandas, footpaths, landscaping, washing line, council fees, house delivery costs and pile foundations.

My guess is that these would add another $600 m2 to the cost of the home taking it to $3,000 m2 or about $300,000. I doubt that a new build of what is a very small 100m2 home with a very basic fit out could be done much cheaper, unless one were to do it oneself which is now pretty difficult given the current regulatory requirements of the Building Act. Add to that the cost of a section and I am unsure how the Minister of Housing thinks factory built homes is the answer to affordable housing.

A “low-cost” land and building package nowadays is anything under $600,000. A pretty typical build is more like $900,000 to $1m.  The only way housing costs are going to go down is if the Minister develops some backbone and addresses the real issues that are causing building and land costs to be so high.

The reality is that he is not going to be able to reduce building costs. Builder registration and the lack of trades training have created the perfect storm for builders to increase their hourly rate - and they have. They are unlikely to drop those rates, and the Minister hasn’t given any indication that he intends addressing such matters.

The Minister has also given no indication that he intends forcing councils to reduce their fees - or that he is going to fundamentally reform planning rules to make it faster and less bureaucratic for developers to turn bare land into housing.

The only way the Minister will be able to make housing more affordable is to remove the biggest single cost which is GST on new housing (yeah right!) or have KiwiBuild make tiny houses and place them on tiny sections - which for some people will be a very good solution if they don’t have energetic kiddies requiring space. For the rest, we will have to do what people have always done, say “Yes Minister”, work hard, save hard, and be realistic about what we can afford.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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