Can you build an affordable house in Auckland? Media debate suggests that rising construction and land costs, together with the costs of meeting planning regulations, are making this extremely difficult.

The debate, however, largely rests on either anecdotal evidence or modelled data. No-one has taken a good look at the actual costs of constructing affordable housing.

The research



Beacon and NZIER have set out to provide a firm empirical basis for understanding the costs of delivering affordable new builds. Focusing only on Auckland (the plan is to extend this work to other areas in time), we gathered cost data from five builders / developers, covering 69 affordable and social homes built in 2015.

We worked with the builders and developers to agree on the seven key components of a housing cost tower:

Land cost Land development & infrastructure costs (Valuation, Council LIM, Offsite infrastructure (e.g. stormwater), Excavation / siteworks, Road works, Fencing, Pathways, Demolition, Disconnections) Professional fees (Urban design / concept design, Architecture, Planning, Engineering / infrastructure, Landscape design, Project management, Other (ecology, acoustic etc..), Legal, Insurances) Construction costs (Materials, trades, builders margin, developer overhead) Council and consenting costs (Subdivision consent, Resource Consent, Development contribution, Other Council costs, Watercare/ Veolia, Building Consent) Finance, valuation and real estate costs (Finance Costs, Sales & Marketing, Real Estate fees, Legal / Conveyance, Valuation) GST.

The work focused on the costs of housing as opposed to the final price that might be charged for a dwelling on a site. Price is inherently determined by market conditions and influenced by supply and demand factors as well as other variables outside the scope of delivering more affordable costs for housing.

Need to measure in order to manage

The first thing we found is that builders and developers are not good at collecting actual costs and comparing them to estimates. Often tax paid is the only indication of how well a project has met estimated costs.

Fundamentally, to improve cost management performance, builders need to measure how well they are doing. Knowing where costs fall, and being able to compare your costs to what others are doing, brings the opportunity to explore where and how to reduce costs.

What does the cost tower show?

The striking thing about the results was that land costs amounted to only 25% of total costs and the Council consenting costs were only 4% of total costs. Unsurprisingly, construction costs dominate the Cost Tower at 51% of total costs.

This indicates that the best place to save costs is within construction and land rather than in other areas.

When we look at the differences between the lowest quartile and the top quartile, we see huge variances in construction and land development costs but less variance for land cost. The lowest quartile of house construction costs (an average $184,644) were $193,000 less than the top quarter of houses (an average $378,418). Even given the potential differences in number of bedrooms, the cheaper houses were built for a surprising 51% less. On a per square metre basis, construction costs ranged from a lowest quartile median of $1,617 psqm to $2,569psqm in the top quartile.

Land development costs also showed a wide variance - the lowest quartile paying only $8,111 compared to $24,503 in the top quartile.

This suggests that there is potential to identify savings in both these areas, and given how much construction contributes to costs, even a 10% saving could net the top quartile of houses over $30,000 in cost reduction.

So why is this relevant?

Our participating developers and builders found this a useful process. They could see that sharing data in a common format helped them to compare and benchmark how much they are able to contain costs against others producing similar houses. Benchmarking enabled them to target areas where their performance is at variance with the rest of the sample. This comparative data is being used by some participants to start conversations about reductions of time and costs moving forward.

It also helps identify the relative value of reducing different cost components. It’s easy to see where the biggest costs fall - reducing these by 10% would harvest much bigger savings than reducing the smaller cost components.

This preliminary study has developed a useful standard format for comparing costs, so that apples are being compared to apples and not oranges. It also gives builders a structure in which to identify, categorise and analyse their own costs e.g. separating design costs for development of land from engineering and planning of house. Understanding more about where costs are falling can only help in identifying where there are opportunities to reduce costs and improve efficiency and margins while delivering more affordable housing.