NZ Homeowners And Building Supplies Sector Will Benefit From Focus On Competition

The Commerce Commission’s final report from a year-long market study into residential building supplies sets out nine recommendations to improve competition and produce better long-term outcomes for New Zealand homeowners and those involved in the industry.

Commission Chair, John Small, says the recommendations aim to provide tangible improvements in competition for key building supplies, without undermining the essential policy objectives of the building regulatory system – focused on promoting safe, healthy and durable homes.

“Ensuring the building regulatory system continues to deliver quality housing to New Zealanders is critical, and must remain a core objective,” Dr Small says.

“However, we can’t ignore the fact that changes are needed to enhance the building regulatory system for the benefit of all New Zealanders.

“We have heard compelling evidence that competition should take a more prominent position in the regulatory system and its decision-making.

“We are recommending that competition should be included as an additional express objective of the building regulatory system, which will contribute to and complement the existing system objectives of safety, health and durability,” Dr Small says.

“Along with our more specific recommendations this would make a real difference in delivering more choice and better quality along with greater innovation for the benefit of New Zealand homeowners.”

Greater clarity about key issues
Associate Commissioner, Anna Rawlings, who presented the Draft Report in August and ended her term as Commission Chair on 5 December 2022, says the consultation with industry stakeholders and other interested parties and testing of the preliminary findings have given further confidence in the findings and recommendations, and greater clarity about the importance of scale.

“Following the Draft Report, we have reviewed all submissions along with preliminary recommendations, and remain of the view that competition for the supply of key building supplies is not working as well as it could be.

“It needs to be easier for new building products and new methods to be introduced into New Zealand, and for competing suppliers to be able to expand their businesses – that is the essence of competition,” Ms Rawlings says.

The Commission has identified two main factors making it difficult for competing products to be introduced and expand:

• The building regulatory system continues to incentivise designers, builders and building consent authorities (BCAs) to favour familiar building products over new or competing products
• Quantity-forcing rebates paid by established suppliers to merchants appear, under certain conditions, to be reinforcing regulatory factors impacting entry and expansion, making it difficult for new or competing products to access distribution channels and increase sales.

“This market study shows that familiar products have become embedded in home-building practice in New Zealand – and the building regulatory system should include competition as an express objective.”

Dr Small says in some circumstances, some types of rebates paid by established suppliers to merchants appear to be reinforcing difficulties faced by competing products and suppliers.

“The solution lies in improving conditions for entry and expansion which, in turn, will improve competition for key building supplies.”

As in previous market studies into the fuel and the groceries sectors, Dr Small says the Commission identified land covenants and exclusive leases that benefit merchants, which will be the focus of further work using the Commission’s compliance and enforcement functions and powers.

Dr Small thanked the many building industry participants and other interested parties who had provided submissions and shared their views with the Commission over the course of the study. The public consultation on the Draft Report has been valuable and strongly endorsed the description, in the Draft Report, of some long-standing issues in the building regulatory system and the reasons for them.

Added focus on OSM and Māori perspectives

Having considered public comments on the Draft Report, the Commission has adjusted recommendations relating to improved decision-making, including to introduce a new recommendation to support offsite manufacturing (OSM).

“Offsite manufacturing can add a range of benefits for construction and has the potential to increase competition for key building supplies, but many offsite manufacturers currently face demand uncertainty and lack scale.”

During the study, Dr Small says the Commission heard from Māori about their perspectives on the residential building supplies industry as participants in the building system, as purchasers and suppliers of key building supplies, and as builders and major developers.

“This has helped us to better understand Māori perspectives, concerns and aspirations regarding the industry.

“These engagements are important to give proper effect to obligations under the Treaty of Waitangi and to ensure that Māori needs, and priorities are properly heard, understood and addressed to support them to achieve their aspirations within the sector.

“We expect that supporting Māori in this way will also support improved competition more broadly.”

Dr Small said this was another area of change from the draft recommendations, from better reflecting a Māori perspective in the building regulatory system to better serving the needs of Māori through the system.

Recommendations to enhance competition

The recommendations of the Final Report from the market study into Residential Building Supplies aim to provide tangible improvements in competition for key building supplies, without undermining the current essential policy objectives of the building regulatory system.

They are discussed in three inter-dependent groups designed to: enhance the regulatory system; support sound decision-making; and address strategic business conduct.

Enhancing the regulatory system:

1. Introduce competition as an objective to be promoted in the building regulatory system

2. Better serve Māori through the building regulatory system

3. Create more clear compliance pathways for a broader range of key building supplies

4. Explore ways to remove impediments to product substitution and variations

Supporting sound decision-making:

5. Establish a national system to share information about building products and consenting

6. Establish an education and mentoring function to facilitate a better coordinated and enhanced approach by BCAs to consenting and product approval processes

7. Develop and implement an all-of-government strategy to coordinate and boost OSM

Addressing strategic business conduct:

8. Promote compliance with the Commerce Act, including by discouraging the use of quantity-forcing supplier-to-merchant rebates that may harm competition

9. Consider the economy-wide use of land covenants, exclusive leases and contractual provisions with similar effect.

Further information about the residential building supplies market study is available on the Commerce Commission’s website: https://comcom.govt.nz/about-us/our-role/competition-studies/market-study-into-residential-building-supplies

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