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New Zealand’s Construction Boom and the Paradoxical Busts

New Zealand’s Construction Boom and the Paradoxical Busts

There is a lot of talk in New Zealand of the housing and construction boom as compared to fears elsewhere in the world of an imminent recession; but if the grass here is so much greener, one has to wonder why ‘33%’1 of construction companies ‘are intending to cut jobs’2 over the coming months and why firms like Tallwood Holdings and Stanley Group were ‘placed in voluntary liquidation’3 last year – the aforementioned impacting us directly. From our involvement in the construction sector, we’ve also seen a bottleneck on housing projects despite a number of fantastic building firms itching to get stuck in. What, then, seems to be causing so much disturbance in the construction industry?

In a lot of cases, a big contributor seems to be a lack of projects in the pipeline which is causing New Zealand firms to tighten their belts in an effort to stay afloat. In fact, 77% of organisations agree that a clearer picture of the future would have ‘the most positive impact in the next three years’4. Perhaps this explains the NZ Government’s recent tack: an investment of $12 billion in a ‘surge of infrastructure projects to “upgrade New Zealand”’5.

This may at first appear to solve some of the issues that Kiwi companies are facing, but is it really that simple a fix? We suspect not. One of the big problems in a boom period is that more and more companies are drawn to the honey pot, enticed by the rewards on offer in a plain sailing market. This sort of saturation in the marketplace can lead to some of the players, like was the case with Tallwood Holdings and Stanley Group, resorting to drastic measures of overly aggressive pricing strategies which ‘undercut competitors to win a lucrative contract’6 in an extreme way, saddling the company and unsuspecting suppliers with an incredible risk – which subsequently led to the collapse of the aforementioned firms when spiralling costs outweighed the price of projects. Whilst the Government has put in place ‘Procurement Rules’7 to combat these kinds of trading practices, hoping to regulate ‘construction projects with an estimated value of $9 million or more’8 by considering the ‘financial health of a company tendering for a project’9, some spectators might see this as not enough to sway some organisations away from such tactics.

Companies are also having to adapt to an environment where there is ‘a sustained and on-going shortage of highly skilled workers’10. The deficit of skilled workers is, in fact, so large that there are entire functions of governmental departments dedicated to analysing and coordinating this unusual phenomenon. This is on top of ever decreasing unemployment rates within the country (4% as of the December 2019 quarter11), meaning New Zealand firms are struggling to retain employees and sustain momentum when the job market is in the employee’s favour.

In all of this doom and gloom speak though, are there any positives to take? Thankfully, the answer is yes. The New Zealand construction industry, compared to its global counterparts, is relatively stable and is great at handling speedbumps on the road – even in worse conditions. Yes, competition can be an issue, but there is competition in any business environment and the cream will always rise to the top. That means that, for those with a solid business model, opportunity offers great rewards.

 

Citations:

 

  1. Sharon Zollner, ANZ New Zealand Business Outlook, anz.co.nz, (Melbourne: ANZ, 2019).
  2. Ibid.
  3. Stephen Forbes, Stanley Group and Tallwood Holdings in Liquidation After Under-Pricing a Housing New Zealand Project in Auckland, Liquidator Says, interest.co.nz, (Auckland: JDJL Limited, 2019).
  4. Marc Daalder, Firms Beg Government for More Construction Work, newsroom.co.nz, (Auckland: Newsroom, 2019).
  5. Thomas Coughlan, Government Announces Billions of Infrastructure Spending, with Roads the Big Winner, stuff.co.nz, (Wellington: Stuff, 2020).
  6. Stephen Forbes, Government Seeks to Address Construction Industry Volatility with New Crown Contracting Guidelines, interest.co.nz, (Auckland: JDJL Limited, 2019).
  7. No author, Government Seeks to Address Construction Industry Volatility with New Crown Contracting Guidelines, diamondig.net, (Baku: Diamond Investment Group, 2019).
  8. Ibid.
  9. Ibid.
  10. No author, Skill Shortages – Essential Skills in Demand Lists (ESID), immigration.govt.nz, (Wellington: Immigration New Zealand, 2020).
  11. No author, Unemployment Rate, stats.govt.nz, (Wellington: Stats NZ, 2019).
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