One of the most immediate announcements from last month’s Economic Reform Roundtable was the freezing of the National Construction Code (NCC). This was intended, in part, to turn around Australia’s flagging construction productivity. The challenge is stark. Construction productivity is now roughly where it was at the start of the century, while other industries have lifted output per worker by around 25 per cent, and manufacturing has improved by 16 per cent.
It poses a puzzle: why has Australia become so much better at producing goods someone can pick up, but not at those fixed to a block of land?
Australia is not unique on this front. Across the anglosphere, construction productivity has generally declined, and Australia sits in the middle of the pack. Since 2000, every country has experienced falling construction productivity, with one exception: New Zealand. In New Zealand, construction productivity has risen by more than 10 per cent since 2000, and by around 20 per cent before COVID-19 brought lockdowns, rising input costs, and a recession.
This divergence is relatively recent. For much of the 2000s, New Zealand’s construction productivity moved roughly with Australia and Canada. But from around 2013, New Zealand began a steady upward climb while Australia declined. Unlike the “productivity bubbles” – brief surges followed by sharp reversals – seen in Australia and Canada, New Zealand’s gains were consistent and sustained throughout the 2010s.
So, what explains this? No single factor can account for something as broad as productivity growth, but in a recent working paper I explore one possible contributor: zoning reform.
During the 2010s, several New Zealand cities undertook wide-ranging “upzoning,” allowing denser housing across suburban land. Two cases stand out. Auckland’s Unitary Plan, rolled out between 2013 and 2016, permitted three-storey development across much of the city. Lower Hutt, a city of about 100,000 just outside Wellington, followed with similar reforms from 2017. Christchurch also introduced significant land-use changes in the aftermath of the 2011 earthquake, though in that case the link to productivity is harder to separate from the broader rebuilding effort.
Multiple studies show these reforms substantially increased housing supply and helped bring down rents. There is also evidence that they might have increased construction productivity, including:
- Timing: Productivity gains coincided with these reforms, and were concentrated in these three “upzoned’ areas.
- Concentration: Productivity gains were concentrated in building construction (which rose 20 per cent over the 2010s) but not in infrastructure (which declined 5 per cent).
Construction productivity statistics are notoriously noisy, with year-to-year swings often reflecting quirks in measurement rather than real shifts. But a simpler measure – dwellings completed per construction worker – tells the same story. In Auckland, the number of homes built per worker doubled between 2013 and 2023, while the rest of New Zealand increased by less than half that. Meanwhile, in Australia over the same period, Productivity Commission estimates show completions per hour worked actually fell.
Why might zoning reform have improved construction productivity? The exact mechanisms need more study, but several stand out.
The first relates to firms. Prior e61 research has shown that productivity growth is closely tied to dynamism: new firm entry and competition. The emergence of medium-density housing created a more competitive environment than the detached housing market, which is typically dominated by a few large firms on the urban fringe. Many small firms expanded by taking on more staff, reducing sector fragmentation. This is consistent with Harvard University research earlier this decade suggesting that zoning regulations prevent firms from growing.
The second mechanism relates to the type of housing itself. Medium-density construction may be more productive to deliver than single-family homes in some cases. Fixed costs can be spread across six or seven units on a single site rather than just one, while repeatable designs can be rolled out across infill areas.
There are, of course, caveats. It is difficult to prove that zoning reform alone caused these productivity gains. Other factors, such as post-earthquake reconstruction and temporary changes to migration policy that brought in more skilled construction workers, clearly played a role. For instance, new migrant workers clustered in Christchurch and Auckland, boosted capacity in exactly the places where productivity rose.
The Federal Government is already pursuing several avenues to lift construction productivity, including through the NCC freeze. These efforts may help. But the New Zealand experience suggests that reforms which expand housing supply – particularly zoning changes that allow more density – can make a difference and could even do more to shift the dial.
New South Wales has already taken some steps in this direction, recently moving to enable more medium-density housing in places like high-income, close to the city, suburbs like Woollahra. If productivity is the goal, these kinds of planning reforms should be supported.
