The Australian Government is failing to keep pace with its commitment to build one million new homes over the next five years, according to the ‘State of the Nation’s Housing 2022-23’ research report published by the National Housing Finance and Investment Corporation (NHFIC).
The commitment forms the basis of the National Housing Accord, announced in October 2022, aligning all levels of government, institutional investors, and the construction sector in tackling housing supply and affordability.
Kicking in from 2024, the Australian Government has also committed to set up a $10b Housing Australia Future Fund to facilitate institutional investment in social and affordable housing.
That commitment has hit a major roadblock with the Albanese Government failing to get crossbench support in the Australian Senate.
With the Reserve Bank of Australia expected to lift interest rates again later today, there is renewed pressure on the Australian Government to make housing more accessible.
At the same time that Australia cannot meet its supply commitments, builders are going broke left and right
The Australian Building and Construction Industry is in the midst of an insolvency crisis, with the ABC identifying four causes of the crisis:
- Rising costs and fixed-price contracts
According to ASIC, 1,709 construction companies entered administration between July 2022 and April 2023, up from 1,284 in the same period 12 months earlier.
The surge in insolvencies can be attributed to the HomeBuilder grant, introduced by the Morrison government in June 2020 as part of its economic response to the COVID-19 pandemic.
The program offered a $25,000 grant to owner-occupiers who signed eligible contracts between June 4 and December 31, 2020, or a $15,000 grant for eligible contracts signed between January 1 and March 31, 2021.
As a stimulus measure, it worked — too well.
As Tim Lawless, research director from CoreLogic, told ABC Melbourne’s The Conversation Hour in 2022, HomeBuilder became “over-subscribed” as people rushed to sign contracts before applications closed.
By February 2023, the scheme had received 138,000 applications and distributed $2.52 billion in grants.
Introducing the HomeBuilder scheme into an already “heated industry” created a volume of work that has proved unmanageable for the nation’s builders.
- Builders are caught in an inflation bubble
Recent price rises are a problem for large construction firms operating at low margins of 7 to 8 percent. These figures mean there’s no buffer when costs increase.
According to a Melbourne-based residential builder, “A lot of builders who are going broke … are office-based. They pay people to manage the jobs — they have an accounts team; they have a marketing team,” which amounts to “a lot of fixed costs.”
These large firms, who might do up to 90 jobs at a time, now face a perfect storm of raw material price hikes and expensive delays due to labour shortages, lockdowns, and bad weather.
“This is where they’re getting bitten.” “If you’re a large or volume builder, you’re caught in this inflation bubble.”
The builder said adding a rise and fall clause to standard building contracts allows the sum of a fixed-price contract to increase or decrease in line with fluctuating costs, which could take the pressure off construction firms and reduce the number of insolvencies.
- A call for better regulation
Wood Central has previously reported on the clash between industry stakeholders to improve regulation.
Phil Dwyer from the Builders Collective of Australia said there are broader systemic issues in the construction industry.
State-based bodies are responsible for regulating the construction industry and issuing building licenses.
He says there are different degrees of oversight in different states.
“There are a lot of builders that don’t have the skills that they should have to hold a licence,” he says.
Dwyer claims regulators are failing to investigate and respond to complaints of misconduct and non-compliance.
“We … need more checks and balances.”
- Last resort insurance is not up to scratch
Dwyer is also a critic of mandatory building insurance required in all states and territories outside Queensland.
Under “last resort” systems, customers can only submit a claim if the builder is insolvent, has disappeared or died, or has had their building licence suspended due to a court order.
“If you have a bad builder and have defects and problems within the building, you can’t make a claim — you can’t make the insurance company even look at it,” Dwyer says.
“If there is an insolvency, for a non-completed home, you only get 20 percent of the original contract value … Even if you can make a claim, you won’t have enough money to finish the project.”
Dwyer says a better alternative is Queensland’s “first resort” insurance scheme, which allows a customer to lodge a claim while the builder is still trading.
In Victoria, the Builders Collective of Australia is calling for overhauling the entire regulatory system, including a switch to first resort insurance, increased scrutiny of surveyors who sign off on building work, and more consumer protections for apartment owners.
“We want the whole [system] changed so that builders become more accountable,” Dwyer says.
Housing supply set to worsen, apartment commencements 40% off 2016 peak
The NHFIC’s report shows the under-supply of housing is set to worsen as demand continues to outpace supply.
Housing Industry Association chief economist Tim Reardon stressed that every state and territory needs to take action to attract more investment in the housing sector to improve the supply of new homes.
In an interview with News Corp Australia, Reardon spoke of a 79,300 shortfall in new-home supply and the acute pressures caused by the rental shortage and the unnecessarily high increases in home prices.
The report also highlighted that to meet the accelerated demand for new homes, there also needs to be an increase in the number of apartments commencing construction.
Apartment commencements were 40% lower last year than at the 2016 peak.
“The imposition of a range of punitive taxes on investors by state governments, combined with additional constraints through the Foreign Investment Review Board (FIRB) and diplomatic disputes, have seen investors withdraw from the market.”
According to Reardon, regulatory costs imposed through new building regulations are further exacerbating the problem.
“These regulatory costs are in addition to the increased cost of labour and materials that increased rapidly over the last two years.
“The combination of increased costs and less investment has seen apartment construction slow well below what is needed in a typical year of population growth. But with migration expected to be at record levels in 2023, the shortage of housing will continue to deteriorate.
New data from the ABS supports the NHFIC report
In the latest Building Activity Report published yesterday, the ABS provided estimates on the value of building works performed during the December quarter along with the number of dwellings which were commenced, completed, under construction or in the pipeline during the quarter.
Andrew Heaton, Managing Editor for Sourceable, has provided a detailed analysis on building activity.
Sourceable covers news across the Australian architecture, engineering, construction and property sectors.
On a seasonable adjusted basis, the data shows a 6.7% decrease in dwelling commencements during the December quarter to 41,374 – the second lowest since the March 2013 quarter.
The multi-unit sector (which includes apartments) dropped by 16.0% to 12,518, while detached house starts declined by 2.5% to 28,586.
Rising interest rates have impacted demand for new home construction and reduced borrowing capacity for potential buyers.
Although the Reserve Bank of Australia (RBA) paused interest rate increases in March, rates have risen from 0.1% to 3.6% since May.
And with strong employment numbers, the RBA is likely to recommence hikes in May 2023 according to ABC News.
Higher rates have also affected property developers’ financing costs and project feasibility.
Commencement numbers are expected to fall further, as indicated by ABS lending data and dwelling approval trends.
Moreover, the construction industry faces a record pipeline of projects, accumulated from mid-2020 to mid-2022 due to low interest rates and incentives like the Homebuilder program.
Despite 238,475 dwellings under construction as of December 31, completion numbers remain modest.
The strong pipeline ensures builders and tradespeople will stay busy in 2023; however, capacity challenges have led to constraints on material and labour availability, increasing completion timeframes for new home construction.
Australia is facing a critical housing timber shortage
In recent years, Australia has faced a shortage of timber supply for housing.
Over the last 6 months, timber shortages have subsided as Covid related supply shocks have been corrected.
Nonetheless, with global demand for timber and forest products expected to quadruple by 2050, and with demand for housing expected to drive a 50% increase in demand for structural timber, Australia is walking a complicated tight rope with supply.
The answer, it would seem, is to plant more trees in the ground.
Announced by the Morrison Government in 2018, the One Billion new Production Trees goal is a start but has struggled to take root.
In August 2021, the ABC reported that less than 1% of trees were planted – meaning it would take 357 years to achieve the stated goal.
According to a Forest and Wood Products Australia (FWPA) interim report published in April 2022, Australia would need to double its intake of imported timber products to meet demand unless it dramatically improves on its progress with the replanting program.
Given the increased competitiveness of global timber markets, this is easier said than done.
Past CEO of the Australian Forest Products Association (AFPA) Ross Hampton summed up the challenge in a April 2022 media release.
“The finding that our reliance on timber imports could blow out to double over the next 30 years should be ringing alarm bells among policy makers.”
“Furthermore, the global push for more fibre to transform building systems, the pivot away from plastics and move to sustainable biofuels, along with the need to halt deforestation internationally, will only make gaining imports even more difficult.” Hampton continues.
“The good news is that there is time to avert this crisis if all levels of government work with industry to ensure Australia reaches its one billion new production trees goal and fill more of the supply gap with Aussie grown, renewable timber, and in the process support the hundreds of thousands of jobs forest industries underpin.”