Hyperinflation, shortages, sending NZ building industry into potential meltdown

Mike Fox

EasyBuild director Mike Fox says he’s heard anecdotes indicating that the number of product price increases builders are dealing with are up 156% on the same time last year. Here’s his take on the state of the industry.

Hyperinflation of building materials combined with labour and material shortages — left unchecked, the industry faces meltdown.

Building inflation is currently out of control, with increases coming through on what seems a daily basis.

There are all manner of excuses given. Some are genuine but many are not logically explainable and seemingly opportunistic, obviously coat-tailing on the feeding frenzy.

I heard from one merchant recently that the number of product price increases they were dealing with was up 156% on the same time last year.

We are not dealing with normal CPI increases of 2% to 3% here, but hyper increases — in some cases of 10% to 15% compounding quarterly, especially when it comes to staple materials like timber.

Couple this with a materials shortage and it paints an unholy mess that is not sustainable. At the end of the day consumers need to be able to afford to pay for the finished product and, in my opinion, we have well surpassed any semblance of a sustainable affordability point for the average consumer.

If you are like me, you are probably wondering what the hell is going on within an already stressed industry, and how long this will continue. 

I have spoken to many senior industry players to try and get some sense and reason for what is happening — which to me, essentially, is an unprecedented spiral of cost and supply misery.

The housing industry is geared to comfortably build 25,000 homes per annum and we are now obviously beyond capacity at around 42,000 per annum.

Add to this the global Covid-19 impact where all indicators were that demand would drop 30%, and manufacturers scaled down accordingly. Given demand actually increased by approximately 20% post Covid-19, manufacturers are scrambling to meet orders with decreased capacity and, as a result, lead and delivery times have ballooned out by months.

James Hardie closed its Auckland manufacturing plant in favour of supplying from its offshore plants and, coincidentally, their products have been in short supply in the New Zealand market since.

New Zealand is heavily reliant on imported material and components, having divested itself of onshore manufacturing capability throughout the 1970s and 80s.

Tiny consumer at the bottom of the world

This means we are a tiny consumer at the bottom of the world in a global market where other countries’ demands come first.

The Covid-19 vaccine supply is a stark example of global supply and our country’s lack of influence.

We are bottom of the supply list despite our numpty politicians espousing that we were going to be first cab off the rank.

We are staring down the barrel of being an unvaccinated inconsequential country with closed borders in an economic backwater.

All the while, other countries will be vaccinated, with open borders and getting on with business as usual.

There have also been global logistic and delivery problems, with massive cost increases in ship freighting, and difficulties even getting containers or space on a ship.

One by-product of seeing the global supply chain unravel will surely be more countries stepping up their own manufacturing again, so that they become less exposed to one or two countries providing what were cheaper goods to the world.

That model has certainly been exposed for the vulnerability which it leaves those who are reliant upon it with.

In New Zealand, you would be quite right to say what about timber?

We grow a surplus of our own right? But our local wharves are overflowing with logs heading offshore.

Meanwhile, you cannot purchase a stick of 90 x 45 decking or fence palings at your local merchant for love nor money. That cannot be for real?

It beggars belief, but this is the position the New Zealand timber industry has been allowed to put the country in.

They’re a mercenary lot that have traditionally gouged the local market and know they can get more money offshore, so take a “pay up or tough luck” approach.

Mark my words, they will be coming cap in hand when the external markets falter. It certainly is not a reciprocal affair, with the supplying party trampling over the local market at the first sign of a better offer!

Perhaps it is time for New Zealand builders’ love affair with timber framing to be checked for more affordable and reliable alternatives.

Apparently, the problem with our internal supply is not that timber mills cannot get logs, but that they are being forced to pay international prices for them which is, of course, rapidly passed on to the industry.

The other issue with timber’s short supply is the mills’ current capacity to keep up with the growing housing market.

There have been so many mill closures over the years that those still operating simply cannot cope with demand.

Some of those closed smaller mills specialised in outdoor products such as decking and fencing, so there is now a shortage of producers of these products.

It would seem that the real problem of timber supply kicked in shortly after Carter Holt announced it would only supply its own stores and PlaceMakers with timber, leaving the other merchants who had relied upon this supply chain to go scrambling for alternative suppliers.

This has resulted in a degree of panic buying not unlike the clearing of the shelves at supermarkets during Covid-19 lockdowns.

Time will only tell if an equilibrium will be hit when the stockpiles are full, but I cannot see the situation changing rapidly this year.

Builders risk being forced out of business

So what impact is this hyperinflation, along with labour and materials shortages, having? 

Builders who have entered fixed price contracts with liquidated damages and milestone payments face the risk of being forced out of business.

Expect to see some builders fail later this year or early next as a result of being caught with spiralling costs, slower than normal cashflow and no way of recovering losses.

Builders should not under any circumstances agree to be locked into fixed price or liquidated damages on contracts in these market conditions.

Banks are not going to like it that contracts might have to be more flexible than they would have traditionally been. However, they need to play their part in this crisis as well by perhaps including some contingency cover.

Consumers will be getting their projects often later and with an element of inflation during the build.

That is the reality of the market conditions, and the builder can only but do their best to forward order and procure at the best rates available.

Consumers will also need to be flexible about product substitutions, as some products just will not be available.

Councils are also going to have to be helpful around accepting that products may change during a build.

They can assist by not being so straight-jacketed on amendments when there is no meaningful difference with a product substitution.

Labour shortages

These are extraordinary times, and we all need to be understanding of each other’s challenges if we are going to make this work.

Labour shortages are also compounding delays, and with the borders shut and full employment of those that want to work, we have a massive productivity and delivery problem.

The construction, farming, horticulture and hospitality industries are crying out for good workers, but this government’s approach is to stop immigration of much-needed skilled immigrants into New Zealand.

This is in the naive hope that labour shortages will increase wages locally, thereby enticing the unemployable off the sofa and out into the workplace.

It is an ideological myth that needs debunking now. If you want the housing crisis solved, crops harvested, and restaurants open to their capacity, then allow the industries to import the workers required.

This is a time for cool heads and caution as one navigates the minefield that has been created. It is also a time to check one’s motives for price increases and act responsibly and ethically.

A quick buck today with an opportunistic price increase might be the straw that kills the golden goose.

One thing I have learnt about builders is that they have long memories when it comes to being worked over financially.

So if you are one of the price gougers, do not expect much sympathy when the market turns, as it surely will.

• 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.

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