Australia’s home building industry is in crisis with dozens of firms going under in 2022.
The primary cause is the escalation of input costs across the construction process, as illustrated in the below graphic from Fairfax:
Extreme inflation in building costs.
Yesterday’s June quarter Consumer Price Index (CPI) from the Australian Bureau of Statistics (ABS) sent another dagger through the heart of the building industry. It revealed that “new dwelling prices recorded their largest annual rise since the series commenced in the June 1999 quarter”, reflecting “high levels of building construction activity combined with ongoing shortages of materials and labour”:
New dwelling prices soar on rapid cost inflation.
New dwelling prices soared 20.3% in the 2021-22 financial year, easily eclipsing the 13.9% increase when the GST was introduced in 2000.
Despite a record number of homes under construction (see below chart), builders are dropping like flies because the cost of construction has in many cases risen above their fixed price contracts.
Record number of homes under construction.
Basically, Australia’s home building industry is caught in a “loss-making boom”, where they are busier than ever, but losing money on every home built.
The situation has important ramifications for both the housing market and economy.
The construction industry employs around 9% of Australians, with the majority of these working in home building. Therefore, any sharp downturn in dwelling construction will necessarily have a major impact on the jobs market.
Australia’s rental market is also the tightest on record just as the federal government is about to open the immigration floodgates. So, if enough builders are driven out of the industry, it will reduce future housing supply when it is needed most, worsening affordability.
Sadly, there are no easy solutions. Many more builders will go to the wall before the supply pressures ease.
