Data from the Australian Bureau of Statistics shows that the backlog of residential construction work has blown out to a record $53 billion.
The value of house building work that is yet to be done has risen to $22.8 billion, while the value of apartment construction work in the pipeline has topped $30.7 billion (chart via The Australian):
Meanwhile, ASIC data shows that nearly 1500 construction companies have shut down since 30 June, putting the year on pace to be the worst in at least ten years.
Earlier this week, the National Housing Finance & Investment Corporation (NHFIC) released its State of the Nation’s Housing report, which forecasts that demand will exceed supply by 124,100 dwellings over the five years to 2028 amid record net overseas migration:
A quick glance of the above data raises the obvious question: why are Australian builders going bust at an alarming rate when there is record demand (via immigration) and a record pipeline of work to be completed?
Master Builders Australia (MBA) has pinned most of the blame on fixed price contracts entered into over the pandemic following the Morrison Government’s HomeBuilder stimulus package.
MBA estimates that fixed-price contracts account for around one quarter of all contracts in Australia’s residential construction sector.
MBA CEO Denita Wawn says “there is fragility and volatility in the industry at the moment that has been a consequence of businesses working predominantly with fixed price contracts that were set pre-COVID”.
She adds there “needs to be a conversation” around fixed-price contracts and appropriate risk-sharing between banks, developers and builders.
Max Shifman, the national president for the peak body for developers, the Urban Development Institute of Australia (UDIA), likewise noted that a large share of work contracted to volume home builders are on fixed prices, giving little leeway for price increases.
UDIA analysis released last month showed that construction costs had soared by around 30% over the past two years, pulling builder margins into negative.
“If you signed a contract just before costs started to grow quickly, and then you’re building during a period where those costs are starting to come into play, that’s when you get into trouble”, Shifman said.
As a case in point, Porter Davis’s entire pipeline of home building contracts in Victoria were on fixed-price terms, whereby the price of the build was locked in up to 18 months prior to completion.
Porter Davis then began bleeding money as costs soared, pushing the company into insolvency and burning thousands of customers and tradespeople.
Given that housing demand is soaring due to record net overseas migration, the home building industry’s crisis has arrived at the worst possible time.
As long as demand outpaces the market’s capacity to produce new houses, the inevitable outcome will be a worsening of Australia’s rental crisis and increasing homelessness.
