Mortgage brokers are now finding escalation clauses cropping up in contracts to allow for material prices to rise; they say banks favour fixed price builds, so getting a mortgage could become harder.
"To me, it's uncharted territory - I haven't seen this before," Paulette Trotter, who's been in the finance industry for three decades, said.
The situation is exacerbated by the pandemic choking the supply chain north and south from Auckland, so severely some builders are having to down tools.
Mike Blackburn of Canterbury's CBS construction co-op is hearing of the pressures on their 600-plus tradie members.
"I had an email this morning from a builder who said by [Monday] afternoon, it'll be tools down for them, they simply don't have the building materials to carry on working," Blackburn said.
Demand was already sky-high as rocketing consents fuelled construction cost inflation of 4.5 percent annually as of June - before the lockdown hit and made it worse.
Blackburn says that presents an "enormous challenge" to quoting a fixed price - till now the standard approach for building new homes.
Stephen Voyle, a principal at Context Architects, said one approach was to fix the price of early work, say for foundations, or for only the early half of a project.
"We can't find anyone to give us a fixed price anymore," he told a recent construction webinar.
"Projects are two years long, and it's just impossible."
Master Builders chief executive David Kelly warned in the same webinar against "not being talked into" a fixed price job.
"You don't know what's going to happen.
"Clients will want a fixed price, I understand that. Builders like to help people.
"But you have to preserve your margin, and be very, very wary."
Matthew Horncastle has 1200 homes booked to build at Williams Corp, the country's fifth largest developer.
Cushioned by its size and the fact it's both a developer and builder, it is still not immune.
"I've never seen cost inflation like this," Horncastle said.
"We've had three price increases just on bricks this year. It feels like every second day, you get a new email about price increases.
"So what's going to happen is the construction industry is going to stop fixed price contracts, or do less of them ... or 'I'll give you a fixed price on the labour, but I won't give you a fixed price on the materials'.
"And then what's going to happen is banks are going to refuse to lend to these people.
"And we're going to see a real interesting sort of dance between the finance institutions and the construction industry and the clients, of how everything's gonna fit together."
Mortgage broker Bruce Patten helped with a fixed price contract just yesterday - they are still being offered, but at the same time he is seeing more escalation clauses.
"Most recently it was a case where they haven't started the build yet and they've already come back and said, 'the price increase is $25,000 on the original purchase price' on a modest Christchurch property."
That buyer had a clause allowing them to back out, Patten said.
Blackburn said such escalation clauses are the new go-to for builders to cope with very thin margins.
Trotter has also run into the price escalating - but without warning.
"I've definitely seen a few things in the last couple of months I've never seen before," she said.
"I've seen in a couple of instances where clients have signed fixed price contracts last year, and the builders have come back going, 'It's changed. You owe me another $65,000'.
"I've got them to take legal advice, but there's nothing they can do. They've had to pay the money."
In one case, provisional costs in the contract complicated the matter, but the other was a straight fixed price.
Trotter has a warning for hard-pressed buyers.
"If you've got somebody that just meets the [lending] criteria, and there's escalation clauses in there... I can guarantee the bank are going to decline that approval."
Patten says what's occurring could have a "huge impact".
"Banks generally won't allow anything to be done on anything other than a fixed price contract, unless you've got at least 35 percent deposit.
"And the majority of people, not just first home buyers ... aren't putting in a third of the purchase price."
Builders expected the choke on building materials to continue even after Auckland exits alert level 4. Horncastle expected some firms won't cope with making changes to contracting.
"It is going to add significant complexity that most people won't be able to deal with," he said.
"We've got record consents at the moment, but I also think we're going to have record amounts of projects not going ahead.
"I would probably get three phone calls a day from people that were trying to do a development and have now given up and are trying to sell the land to me."
The government needed to do more about maintaining productivity, while combating Covid-19, he said.
The construction webinar heard that ways to manage the problems include involving a contractor early on in a build, or to lock in what products are specified for use, and the price, off finished drawings.
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Comments
Building costs are already way out of line here compared to just about anywhere else in the World - You only have to look at the UK and US home building and improvement shows that are on TV pretty much every evening to have that made brutally clear to you.
House prices have pretty much doubled in the last few years and that allows for a hefty increase in bulding costs over and above land and inflation, and it's still not enough.
The last two times that I have been forced to employ tradesmen, the hourly rate has implied a personal income of $200,000 plus for a forty hour week - and that's not recently.
The last time I inquired locally about a central heating burner, the local cost was $9,000 plus $600 cartage from Auckland. That exact same burner could be bought at retail in Ireland for 1,300 Euros (about $2,200) plus another $500 to deliver it from said retailer in Ireland direct to my door in Dunedin. At that point, paint in UK and Irish hardware stores was about 30% of the price here, and most oher things likewise. We won't even talk about copper pipe and fittings.
The banks might be doing us all a favour by finally saying 'NO!' to this whole merry-go-round.