Construction times are up, material costs have skyrocketed and the threat of a looming wave of builder bankruptcies are all laying the groundwork for a perfect storm in Australia’s residential construction industry, with new and existing home buyers, as well as renters, all likely to suffer.

Why all the talk about home builders?

It’s been apparent that the building industry is in trouble since halfway through the pandemic.

The rush to build new properties, spurred in part by the Federal Government’s HomeBuilder grants and the rise in national property prices, put unprecedented demand on the sector at a time when global prices for materials like timber and steel skyrocketed, and closed borders meant that migrant labour was unavailable.

Recently Queensland homebuilder Pivotal Homes has entered into liquidation. It joins other builders like Privium and Tasmanian Constructions, a franchisee of Hotondo Homes, which have both gone into liquidation since the start of the pandemic.

Construction insolvencies across the country are up 30 per cent in the past year, according to Ray White chief economist Nerida Conisbee.

Can’t builders just put prices up to cover the difference?

Fixed price contracts are the norm in the residential construction industry, in fact, many lenders won’t agree to finance a project without a fixed price.

Industry groups say that one of the reasons for the current crisis is that many builders entered into these contracts before prices rose and labour shortages became apparent, and are now faced with having to deliver potentially loss-making projects.

The ability of builders to make changes under fixed price contracts vary state to state, with Queensland’s the most lenient of the eastern states.

Recent efforts by the Victorian building industry to loosen that state’s laws have been rejected by the State Government.

Master Builders Association spokesperson Rowan Towse recently described fixed-price contracts as a “double edged sword.”

“You have to [have them], in order to get the work, but it’s a double edged sword because you’re signing up contracts with prices that six months down the track aren’t going to be relevant anymore but you’re trapped in that price,” Mr Towse said.

The MBA estimates that prices for some key materials have increased by as much as 4.2 per cent in the past quarter.

Steel and timber are among the materials experiencing the biggest uptick in prices, according to industry groups.

What’s making it so difficult to finish houses on time?

Not only are prices for timber and metal up on their pre-pandemic rate, but they are also in short supply, with global supply chain issues leading to a backlog in deliveries during the pandemic.

But issues sourcing material was only part of the issue, HIA economist Tom Devitt said, with worker shortages earlier in 2022 also having a flow through impact on the building activity.

“Activity early in the year was held back by the staff absences associated with the COVID-19 Omicron outbreak and the extended leave many Australians took over the summer holiday period,” said Mr Devitt, citing ABS figures for the March quarter.

Will the building industry get back to normal soon?

Experts say it could be some time before the industry returns to normal, despite rising interest rates expected to eventually drag on the sector.

“All data coming out about the construction industry shows ongoing challenges,” said Ms Conisbee.

“Supply chain blockages, the war in the Ukraine and bushfires in 2019/20 are all impacting the sector and it will take some time for all of these issues to be resolved.”

A 75.7 per cent uptick in detached home construction since the pandemic started meant there was an unprecedented number of homes waiting for building to commence, said HIA chief economist, Tim Reardon.

“Rising interest rates can cause building commencements to slow within six months, but in this cycle, the lag will be significantly longer,” he said.

“There were 75.7 per cent more detached homes under construction at the end of 2021 than pre-COVID.

“There are also more homes approved and waiting commencement than in any previous cycle… With this elevated volume of homes in the pipeline, the number of homes under construction will remain at this high level until at least June 2023.”

There is evidence that demand for new builds may be declining, with data from the Greenfield Market Report, produced by RPM Group, suggesting that demand for vacant lots has been declining since reaching a crescendo in 2021.

In the Victorian green fields market there was a 29 per cent year-on-year decrease in vacant lot sales from 6793 in the first quarter of 2021, to 5285 in 2022, according to the report, although the reduced demand did not lead to a decrease in the price commanded by vacant lots.

What should I do if my builder looks like they are in trouble?

If you think that your builder may be insolvent, you should check whether they have gone into voluntary administration or liquidation, or become bankrupt.

You can do this by checking the National Personal Insolvency Index or ASIC’s register of companies, depending on whether your builder is an individual or company.

If they are insolvent, take note of the details of the company appointed as administrator and get in contact with them as soon as possible.

Many builders have to take out builders’ insurance and you may be able to make a claim.

If you suspect your builder is insolvent get in touch with your state or territory’s government construction body or seek independent legal advice before making your next move.

What does it mean for the housing market?

Rising construction costs mean that fewer homes will be built, according Ms Conisbee, inevitably leading to price increases for those who are starting a new build in 2022.

“This is partly because of the difficulty in accessing both materials and labour, homes that are in the pipeline to be built will be delayed, in some cases indefinitely. This makes a new home more expensive,” she said.

This could boost demand existing residential property market, she added.

“The slowdown in getting a new home, as well as rising construction costs will also mean that people who would have otherwise looked at buying a new home will look to the existing market,” she said.

Heat coming out of the construction sector is also coinciding with the opening of Australia’s borders, adding another layer of complexity to the situation.

“There will be a battle for accommodation between owner-occupiers and renters,” Ms Conisbee said.

“Rising demand for existing homes from owner occupiers is coming at a time when we are also having increased demand for rental accommodation.

“Unlike house prices which are influenced by interest rates and are slowing as a result, rents are going up and will continue to increase with international borders reopening and migration starting up again.”

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