The price of building materials and sections are continuing to climb. Photo / Getty Images
A "perfect storm" of pressures has seen the cost of building an average house in Tauranga skyrocket by about $130,000 in the last year, the head of a major building company estimates.
Higher prices for land and building materials hit by global supply chain issues have been named among the leading contributors to the rising cost of building a new home.
Budget blowouts have left some to walk away from fixed-price contracts - a pricing method favoured by buyers and banks but which the industry says is increasingly unworkable.
The Government has been criticised for doing too little to intervene.
Minister for Building and Construction Poto Williams said while the Government did not regulate retail prices, it had already signalled an intention for building products to be the subject of a market study by the Commerce Commission.
New Zealand Building Industry Federation chief executive and Construction Strategy Group executive director Julien Leys said there was massive volatility around material prices.
He was aware of some builders, contractors and homeowners walking away if they had signed up for fixed-price contracts that "were now out the window".
"It may have been three months since they signed the contract and if they can't get any agreement or variation to accommodate the increase in prices, which could be 30 per cent, they are preferring to take a smaller hit. Rather than the bigger hit to their overall cash flow if they proceed with the work."
Leys said fixed-price contracts were favoured by the banks but "they aren't going to work anymore".
"The big shift for the industry will be moving away from that to allow for variations."
Projects were blowing out by "huge amounts", he said.
As an example, he said steel costs had jumped by 15 per cent and had a lead-in time of six to eight months.
Classic Builders director Peter Cooney said material costs were rising and suppliers were pushing up rates.
For an average new build, the price of land in Tauranga had increased by about 40 per cent, or $80,000 in the last 12 months and materials by about $50,000.
The sector was in the biggest boom it had seen in decades.
"We've got massive price escalations, we've got supply issues and a labour shortage. That's the perfect storm."
"All of this is leading to a bit of a disaster... the problems have been compounding every year and we just haven't been building enough.''
Cooney said ''it is scary stuff'' and would be hard on potential homeowners.
Now builders were putting escalation price clauses in their sell and purchase contracts and he said some developers could potentially ''lose the shirt off their back'' as it became harder to get financial backing from the banks.
The Government needed to do something to secure the supply chain offshore.
Cooney said the rise in the price of sections he had seen in Tauranga was also happening around the country.
''For example, we paid $150,000 for sections in Christchurch and six months later we are paying $350,000. That increase is huge."
Venture Developments director Mark Fraser-Jones said price of wood products, insulation and various claddings had increased by 10 to 20 per cent across the board.
"But perhaps the biggest concern is the price will become completely irrelevant if the supply chain remains broken. Access to both local and international products used in construction are being constrained unnecessarily and it appears our government has little interest in addressing this issue."
Fraser-Jones said for the past 14 years Venture only offered fixed price house and land packages.
"As a result of constant price rises, we are releasing fewer packages than normal as we cannot accurately forecast out more than six months."
Insight Architecture architectural director Matt Hodson said demand for the company's services had doubled since the first lockdown.
The biggest challenge was finding new design staff to help meet the demand, while the shortage of builders and construction materials was resulting in big rises in building costs and longer construction times.
"Until the Government opens the borders, letting more builders and tradies into the country we will struggle to meet the labour demand.''
It was now common to see 10 per cent or more added to projects to allow for material cost escalations.
NZ Institute of Quantity Surveyors president Martin Bisset said consultant surveyors were adding caveats to their project estimates and seeing their suppliers and sub-contractors offering fixed rates for shorter periods, such as one month.
"There is a high chance that some contractors will be caught and not be able to meet their contractual obligation, thus resulting in receivership or liquidation. There is no silver bullet to resolve the issue quickly.
"It requires all parties to recognise there is a problem and to work on constructive solutions and take a best for project approach."
He said it was difficult to put an exact figure on the increased costs of projects, but some examples of average material increases from May to August 2021 were: structural timber up 11.5 per cent; timber cladding 7.2 per cent; mouldings 6.9 per cent; particle board 6.2 per cent; concrete and reinforcing 3.6 per cent and rainwater goods 6.3 per cent.
Registered Master Builders vice president and owner of Calley Homes in Tauranga, Johnny Calley, said the industry wasn't a high-margin sector and escalating costs could put some out of business.
"I think consumers have to be accepting there are going to be multiple delays and cost increases. They should be talking to their builder on how they can share the load of that.
"Because ultimately, if they don't, it will be fatal for both parties if building companies go bust then everyone loses, including the consumer."
Construction Industry Council executive director Graham Burke said in the 1980s and 90s fixed-price contracts with no escalation clauses were impossible "and we worked our way through that".
He said cost escalation risks again needed to be shared.
Williams said the Construction Sector Accord was working with industry to inform ministry guidance on product substitution information, raising awareness of alternative products and reducing reliance on constrained building products.
An ANZ spokeswoman said the bank would still lend to customers building a home without a fixed price contract.
"But, as is the case with all lending, the criteria differ depending on the contract type. Unfixed contracts that could see costs escalate carry greater risk as they don't have the price certainty that a fixed price contract offers."
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