More and more Aussie building firms are buckling under material and labor costs, but the industry has been vulnerable for decades, one expert says, and swaying on a rickety foundation of vested interests.
Perth-based companies Home Innovation Builders and New Sensation Homes on Friday joined a growing list of builders to go bust in 2022 as a perfect storm of inflationary pressures, surging costs and fixed-price contracts eats away at profits.
The company collapses – along with giants such as Condev, Probuild and Privium – has left a crowd of subcontractors, tradies and homebuyers facing the prospect of their own financial devastation and deciding whether to forge ahead with projects or cut their losses and walk away.
Australian Apartment Advocacy head Samantha Reece said the nexus of inflationary pressures may be unprecedented, but blaming the situation solely on a supply chain crunch was also misguided.
Reece said the industry has long worked on razor-thin profit margins, making it vulnerable to financial shocks such as sudden hikes in energy, material and labor costs amid Covid-19 and the war in Ukraine.
The supply chain crunch has also crimped a construction pipeline that has been humming thanks to ultra-low borrowing costs and government grants designed to stimulate activity, with the delays particularly disastrous for builders who have signed fixed-rate contracts with clients.
Throw in 20 years of questionable planning and regulatory settings and Reece said the result is a property industry primed to operate as a “runaway train”.
“Primarily the building sector has always worked in a very small margin, one per cent to two per cent profit, maximum five per cent,” Reece said.
“So, consequently it is unsustainable. And then we’ve got an escalation in petrol prices. We’ve got war in Ukraine.
“I’ve got a number of developers I’m aware of who are going back out to buyers, saying the price now is 35 per cent higher to build it.
“(They are saying) ‘Are you prepared to be part of the build as we move forward, or do you want to drop out?’
“So this is unprecedented times really, in terms of what we’re witnessing and what we actually need to do is actually calm the market down substantially.”
Reece says as far as apartments are concerned, the true cost of stalled and crumbling projects is the loss of confidence in the property market itself.
She said moves 20 years ago to allow construction industry self-certification were the “first nail in the coffin”, while poor planning decisions – including approving construction in areas now vulnerable to floods – are another blemish on an industry hungry for money.
“Industry is looking after themselves, but the ones left in the middle and hung out to dry are the buyers.
“There’s 2.5 million apartment lives and owners in Australia. That’s 10 per cent of the voting public.
“I’m wondering when the government’s going to wake up and realize this 10 per cent is no longer prepared to accept shoddy behavior from builders and developers.”
Meanwhile, the domino-like tumble of construction companies – which also includes the Hobart branch of Hotondo Homes – is merely the “tip of the iceberg”, according to Association of Professional Builders co-founder Russ Stephens, who last week estimated about 50 per cent of Australian building companies were currently trading insolvent.
He said so many building companies were in trouble because they had collected advance payments to complete houses – meaning they were showing a healthy bank balance – but had not factored in bills.
He suggested cost escalation clauses needed to be used more commonly in building contracts, although he acknowledged that would mean extra pressure on consumers as they would be slugged with the rising prices.
With reporting by Sarah Sharples