Building Today columnist and EasyBuild director Mike Fox says the aftermath of the Covid-19 crisis will be similar to the other global crises he’s seen in his time in the construction industry which, he says, is in a better place than many others to weather the storm.
Here we go again, I hear myself say — entering the fourth industry downturn across my 40 years in building.
Like clockwork they come around every 8 to 10 years. And they can happen suddenly, as has been witnessed with the virus we’re dealing with now.
There was the stock market crash in 1987, the Asian Financial Crisis in 1997, the Global Financial Crisis in 2007, and now in 2020, Covid-19.
There’s a certain pattern to these events and their aftermath that shouldn’t be ignored, and recognising and acting on this now will help put our industry in the best position to succeed over the coming months and years.
Every one of these events has had a chilling effect on our industry, as big-ticket items such as housing and new buildings tend to be easily put off until perceived better times.
One of the things I have learnt from the school of experience is that the effects of these events are not instant on our industry, but are typically deep and enduring.
When will we feel the impacts of Covid-19 really kick in?
The real impact tends to start six months after the initial shock, with real despair kicking in about 12 months afterwards.
This despair tends to linger for two to three years before gradual improvement, and peaking again after about seven years.
The market then shows signs of overheating, and gets ready for its next readjustment.
Right now, builders will be busy trying to catch up after having five weeks taken out of their production, and adjusting to working under new Covid-19 working conditions.
They might be so busy they don’t even notice that the phone has stopped ringing with easy new orders like it has done for the past few years — so work will dry up later this year as a result.
Come February/March 2021, consent numbers will have nosedived from a heady high of 38,000 this year to less than 20,000 per annum next year.
That is a drop of 40% to 50% of the current volume gone out of the market, which will transpire into a smaller workforce and less training.
Unfortunately, it has been proven time and again that once trained or partly-trained young staff leave the construction industry, they rarely return. It’s the ugly underbelly of the boom-bust cycle that plagues our industry.
Who is likely to survive?
Good builders that have traditionally built-to-order will survive this downturn, albeit as a smaller, leaner organisation.
The less reputable builders who have previously survived because clients had little choice will likely be starved out of the industry.
The spec builders and ones who have forward purchased land may not fare well as their market contracts and they are faced with the financial hurdle of settling for land that they were previously on-selling with ease.
To make matters worse, the land will probably now be worth less than what they are contracted to pay; and they may also have unsold homes that will probably need brutal discounting to reduce debt and holding costs.
It will be a challenging period, especially for those that might be overextended, or for younger industry participants who thought that the heady boom we’ve just left behind is the way the industry always is. The survivors will be all the wiser for the experience.
Will your location help you?
How your market pans out will be somewhat dictated by your geographical location.
Centres such as Auckland and Wellington will be affected — but to a lesser degree than locations that were reliant on tourism and hospitality, or regions just plainly overheated with no supporting underlying employment infrastructure.
The latter could be in for very tough times as housing shortages turn into over-supply, with residents moving away to find employment.
This crisis is rather unique in that it is genuinely global, so there will be very few economic bright spots anywhere in the world.
It was also economically brutal in its arrival, in that apart from supermarkets and a few essential services, every business had to shut down with almost no warning.
Tourism and hospitality businesses may never recover, taking a big slice out of GDP and leaving many unemployed as a result.
But it’s not all doom and gloom
The construction industry is in a better place than most to weather the storm — and, indeed, we got a favoured hand in getting back to work during Level 3 and returning to some level of normal life.
Let’s not squander our more fortunate position by dropping the ball around safe Covid-19 building practices.
The irony of it all is that the best time to do a project is in a downturn. Why is that? Typically, we’ll see the following happen:
• Service levels increase because competition is stronger.
• Local authorities are under less pressure.
• Work-hungry subtrades suddenly discover, or in some cases, remember, that fair pricing, loyalty and service results in repeat business.
• Manufacturers will need to revise their distribution and less than transparent regional pricing practices, and suppliers will look for economies within their businesses, instead of cranking pricing up.
This all means the builder can better control his production, budgets and delivery.
So, for clients out there thinking about a project, take my advice — you will get better value and better delivery by building counter-cyclical.
I’m not joking when I say that some of the most satisfying and financially successful times for good builders are when the market is tighter.
NZ’s opportunity to make headway into providing affordable housing
There will be a correction in the market and land prices will rightly pull back from the over-inflated levels they got to.
Clients will be re-evaluating their aspirations, and will be looking for value, amenity and efficiency as opposed to size and status.
Rather than the bespoke four-bedroom, two-bathroom, double-garaged home, they’ll now work within their financial comfort zones and opt for a smaller, often predesigned energy-efficient home.
Interestingly, BRANZ quoted in its April 2020 Build magazine that 58% of new builds since 2014 have been in the top 25% of price ranges.
That means we’ve been building a disproportionate oversupply of expensive larger homes, with the greatest areas of demand being affordable homes, which have been hardly catered for.
A now not-fit-for-purpose Resource Management Act (RMA) and accordingly high land prices have created perverse market conditions where it is very difficult to create affordable housing.
When are we going to wake up? The system is broken and skewed towards providing homes that do not match demand. Sounds like the subject for another article, so watch this space!
They say you should never waste a good crisis when change is overdue and much needed, so what could the Government do to buffer some of the economic headwinds?
I liken the conditions we face in New Zealand now to what it must have been like in the 1940s.
We needed a lot of affordable housing and we needed a lot of employment for the returned forces.
The answer was dealt with very pragmatically by the government of the day. They took tracts of land, put in infrastructure, and built robust modular housing that created the homes and employment needed.
If New Zealand wants affordable housing, it’s not going to come from traditional routes through the private market. The spectacularly failed KiwiBuild initiative lays testament to that.
However, a brave and forward-thinking government would do exactly what our forebears did, and sidestep the RMA and obstructive local authorities to just get on and create the housing needed.
Undoubtedly, one of the best economic stimulants at this time would be to increase residential construction. Even Sir Roger Douglas is espousing this.
The employment and trickle-down impact it has on the economy is far reaching.
This quote from the PWC 2011 report Valuing the Role of Construction in the New Zealand Economy, which I believe stands true today, tells us everything we need to know:
“For every dollar invested in construction, three dollars of activity are generated across the economy, making it one of the most stimulatory sectors.”
The answers are there like a flashing beacon for producing the housing, employment and economic stimulus New Zealand will need to recover from this.
But whether the politicians can grasp the opportunity will be the difference in how long New Zealand stays down in the doldrums.
• This article contains the author’s opinion only, and is not necessarily the opinion of the Registered Master Builders Association, its chief executive or staff.