Barriers to entry - building materials edition

The Commerce Commission's final report on grocery market competition makes me more hopeful that the Commission will weigh entry barriers in its report on building materials.

We'd submitted on it in February, before the grocery report came out. 

Nikki Mandow summarises some of the submissions over at Newsroom. 

The Property Council was one of several submitters that put local councils, and their aversion to risk, at the heart of a lack of innovation when it comes to building materials. 

The disastrous leaky building and other issues of the 1990s and early 2000s were in part a result of using the wrong building materials, and often left councils the ‘last man standing’ as developers and builders bailed. Ratepayers forked out millions of dollars to fix the problems and as a result councils closed their doors to innovation.

“Councils fearing joint and several liability guard against the downside risk of less familiar materials; they see none of the upside benefit,” New Zealand Initiative chief economist Eric Crampton said in his submission. 

“Council risk aversion, caused by liability rules, creates a regulatory barrier to entry against novel building materials unless those materials provide a very substantial advantage over existing materials in large-scale developments.”

At the same time, architects and engineers, knowing it will be harder to get council building consent if they use unknown products, stick to familiar materials used in familiar ways, Crampton says.

“Easing formal regulatory constraints and informal consenting barriers is critical.”

Work commissioned by MBIE a couple years back showed that in 48% of cases resulting in awards of damages, Councils were on the hook for 100% of the cost. If a builder uses something new, council gets none of the upside and all of the risk. Why would we expect sensible outcomes out of that structure?

NZ Initiative’s Eric Crampton doesn’t mince his words when it comes to questioning where the Government’s priorities - and taxpayer money - would be best directed.

“The commission could spend all of the coming year exploring vertical separation of material retailers, builders, and material manufacturers; estimating profit margins in any of those businesses and deciding whether they are high relative to overseas competitors; arguing with existing businesses about how the Commission has failed to account for differences affecting weighted cost of capital and profit margins here as compared to abroad, and tying up critical staff in each of those companies for months when they should be helping to get more houses built.

“Or, it could spend the coming year delving deeply into the regulatory and consenting constraints that may together form a substantial barrier to entry. It could make recommendations that would enable far stronger competition from overseas material suppliers and developers. And it could thereby help open the market so better houses could be built more cost-effectively.”

The deadline for the commission to deliver the final report is December 6.

Fingers crossed we'll wind up being able to parallel import houses and put them up across the country.