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Panic rising as major home builders go bust despite a construction boom and soaring house prices

Vanessa De Groot 15 Dec 2021

Alongside a house price boom, Australia is in the midst of a homebuilding boom, with the Housing Industry of Australia expecting a near-record number of new homes will be built over the next 12 months.

But for many in the residential construction sector, it’s a profitless boom – and several major players have recently gone bust, with fears more will follow.

Brisbane-based giant Privium and Tasmanian-based Inside Out Construction have gone into voluntary administration, while ABD Group in Melbourne has been put into liquidation.

On the Sunshine Coast, BA Murphy Constructions has had their licence suspended by the Queensland Building and Construction Commission after allegations it wasn’t paying sub-contractors.

Why are construction companies folding?

A perfect storm of factors has been brewing for the better part of 2021, and now the rainy season has arrived.

Supply chain issues, with a shortage of building materials worldwide resulting from COVID-19 disruptions, coupled with natural disasters from freak storms to bushfires, have heaped pressure on builders.

Those shortages have led to prices rising exponentially, particularly for timber and steel.

On top of that, a labour shortage is making it difficult to find tradespeople, giving workers the power to command huge wages.

So, the overall cost of constructing a new home has been pushed up significantly.

Adding to this is the lengthy delays in actually getting the materials, which has led to some homes taking more than 12 months to be build, further adding to building companies’ costs.

With the majority of builders signing fixed price contracts with buyers, and the margin for escalating costs being inadequate, many are losing money on every single project.

It’s a big problem in exceptional circumstances like we’re seeing at the moment, said Russ Stephens, co-founder of the Association of Professional Builders.

“The average cost of a contract for a builder has gone up between 15% to 20% over the past six or seven months alone – and up to as much as 50% in some areas,” Mr Stephens said.

“But because they’ve already signed a fixed-price contract, they’re unable to recoup the costs from customers, which means they have to absorb it.

“They have a fixed income coming in, but they money going out is up.”

Mr Stephens estimates some builders are losing about $40,000 on each job, and for those doing larger jobs, they’re more likely losing hundreds of thousands of dollars.

Peter Koulizos, Property Investment Professionals of Australia chairman, said the HomeBuilder grant, which offered up to $25,000 to eligible buyers signing a building contract from the middle of 2020 until March 2021 – a scheme designed to stimulate the economy following COVID – was the catalyst for the issues that now plague the building industry.

It led to a building boom by pushing demand up significantly, but with a supply shortage occurring at the same time, it created the “perfect storm”, Mr Koulizos said.

It’s just the tip of the iceberg, with more failures to come

The issues in the building industry will likely carry through until at least the end of 2022, Master Builders Queensland deputy CEO Paul Bidwell said.

“We think there will be more insolvencies, and the time we’re really concerned about is the first quarter of next year,” Mr Bidwell said.

Initially, supply chain issues were impacting mostly smaller builders that didn’t have leverage with big suppliers, but it’s now impacting all builders, big and small, he said.

Mr Stephens believes more than 60% of builders are currently losing money, with many failing to manage their finances properly.

“This is the tip of the iceberg at the moment – we think it’s going to get a lot worse in 2022 in terms of building company failures,” he said.

According to Mr Stephens, the problems in the industry need to be addressed openly and honestly, with financial education programs for builders needed to help reduce the number going bust.

“If we sweep it under the rug, it will be too late next year,” he said.

Builders need to understand where they are right now financially and where each jobs sits in terms of profitability, which will help with starting their next job and signing future contracts, Mr Stephens explains.

They should also be careful about signing contracts too far in advance, unless they factor in appropriate cost rises, he added.

What can buyers do to reduce their risk?

Many more buyers are likely to be affected by construction companies folding, with the mental health cost for both builders and buyers involved being “extraordinary”, according to Mr Bidwell.

But those yet to sign a contract can take some steps to reduce their risk, he said.

People interested in building would be wise to wait 12 months to see if some of the major issues are alleviated, to be able to trust a builder won’t go broke and there will be some more stability in costs, according to Mr Koulizos.

“There is now no extra demand from HomeBuilder because it has finished, but there is a still a worldwide shortage of certain building supplies,” he said.

“If you’ve got the land and there is no urgency to build, just wait and be patient. A 2.5% interest the holding costs won’t kill you, and you’re going to be building with more surety in 12 months.”

For buyers signing contracts with builders now, Mr Koulizos’ number one tip is to make sure the builder has the right insurance cover, to cover you if they go bust.

In that case, the insurance company will pay for someone else to come in and finish the job.

That’s not an easy process, and it means owners will be stuck living somewhere else for a much longer period, but it gives some protection, Mr Koulizos said.

“If you’re already building, with your home already under construction, buyers should make sure they only make progress payments after somebody has inspected it to make sure all the work you’re paying for has been done.”

Anyone signing a contract today should do their homework and think carefully about which builder they choose, rather than just going with the best price, as it might not be enough to complete the build, says Mr Bidwell.

A cost-plus contract, where the actual cost of supplies is passed onto the buyer throughout the building process, is also an option, but those aren’t favoured by banks due to the uncertainty.

“Buyers should talk to builders and see if they are confident they can deliver on time and for the price,” he said.

In some cases builders have come back to owners and asked for more money to deliver the build, and that can be done if builders and owners agree, he added.

“The only saving grace in this is that the housing market has gone mad,” he said, adding that some buyers are willing to pay the extra cost – if they had the capacity to – because they know their properties have experienced a significant value uplift due to the housing boom.

While each state is different, in Queensland a temporary measure has been implemented by the state government in the form of an independent mediation service called the Accelerated Builder/Consumer Dispute Framework.

It’s designed to deal with disputes between owners and builders should they arise.

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Sydney auctions: cheaper homes get strong response as fear of missing out gets replaced by fear of overpaying

Aidan Devine 11 Dec 2021

Properties priced below the Sydney median house price of about $1.25 million have been getting a stronger response from buyers.

It comes as agents revealed the fear of missing out that defined the mood of Sydney home seekers earlier this year has been replaced by a fear of overpaying.

Among the most competitive auctions held Saturday was for a townhouse in Macquarie Park.

Seven bidders vied for the home on Fontenoy Rd and the price was pushed to just under $1.2 million. The last townhouse to sell in the suburb changed hands for $1.02 million.

Ray White chief auctioneer Alex Pattaro called the property on the market at $1.16 million and dropped the gavel at $1,195,000.

Selling agent Russell Sheffield of Ray White-North Ryde said the house attracted a lot of interest because it was well-presented and came with rare features such as additional storage space.

Many of the buyers were drawn to the home after being priced out of the detached house market in the area, Mr Sheffield said.

“It’s the domino effect,” he said. “A train of money is flowing into the strata property market now and places with courtyards are popular … a house in the area would be around $2 million.”

Close to 1900 properties were scheduled to go under the hammer this week, the highest weekly volume of sales since 2014 and an unusually high number of sales for this late into the year.

Nationally, it was the biggest auction day since CoreLogic records began in 2008.

It’s followed what’s been a busy spring selling season across Sydney, with the end of lockdown restrictions in October releasing a flood of new listings into the market.

The greater choice of available housing has helped moderate prices and auction clearance rates have slumped.

The success rate of auctions last week was a year-low of 63 per cent, roughly in line with the long-term average for Sydney auctions, but well below the 90 per cent clearance rate recorded earlier this year.

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‘Something needs to give’ How the timber shortage is affecting Australians

Building a new house or undertaking a significant renovation comes with its own mixed bag of financial, emotional and physical challenges. Sticking to budgets, committing to timelines, finding alternative accommodation – often in the form of living with extended family – it’s certainly not for the faint-hearted.

Those courageous enough to embark on this journey during a pandemic and a building boom have faced a challenge that would break even the strongest of wills – specifically, a scarcity in materials that has proven almost catastrophic for many home owners.

Timber supplies were all but stripped bare after the announcement of federal government incentives resulted in a surge in the residential building industry. The shortfall in supply to meet the surge in demand resulted in runaway inflation for timber products, forcing many builders to consider more expensive alternatives such as steel and masonry.

For some builders, the timber shortage has led to the collapse of their businesses as they are forced to make the impossible choice between paying exorbitant material prices or accepting delays and consequential liquidated damages.

For home owners in contracts in which the builder has been more contractually savvy, it has resulted in budget blowouts and/or program delays. For some, it has meant the forced sale of a partially built home.

Kate Henry and her husband Paul aren’t new to the renovation game, having tackled multiple home renovation projects. It also helps that they both work in the construction industry, so have access to trades and know-how that a novice home renovator could only dream of, but this hasn’t prevented their current renovation from being affected.

“The materials are just not available. That’s evident [when] you drive through a Bunnings or Mitre 10 timber yard and they are empty,” says Henry, who has spent her fair share of hours in hardware stores.

“Eighteen months ago, they would have had absolutely everything. One of our big issues was with the timber for our decking. The price of the timber we needed has gone up significantly. Then there is treated pine, which is the standard external timber that everyone uses for everything, which has gone up from $2.20 a metre to $5.68 a metre … and that’s if you can get it.”

It’s not just the smaller residential builders hurting from the timber shortage; it is also having a calamitous effect on larger, well-established contractors.

“I’ve been hearing stories of larger builders handing clients back contracts as they can no longer build houses for what they agreed initially,” Henry says.

“Something needs to give,” she warns would-be renovators. “It’s either your time, your material selection or your money – or sometimes all three at once. You just have to be really prepared and be willing to compromise if your ideal item isn’t available.”

Home builder Victoria Wilson echoes the sentiment, saying, “We’re having to compromise on compromises.”

For Victoria and her husband Glenn, the timber shortage has meant their dream home in Mount Eliza – and their mental state – has taken hit after hit. With three young children, accommodation anxieties and unwell in-laws requiring care, there is little time to focus on the trials that come with a new build.

“The timber shortage has affected us so much that we have had to re-engineer our house,” Wilson says.

She sympathises with her builder and appreciates that he’s doing everything possible for them. “He’s had to agree to contracts with framing suppliers that materials will be provided with a TBC delivery date and a TBC price because the timber yards don’t know when the next shipment is arriving and they also don’t know what the price will be.”

With so many unknowns, Wilson’s budget has blown out significantly. “We’re already projecting to be $100,000 over budget and we have no clear finish date in sight.”

Australia has increasingly sourced much of its framing timber from abroad, including the United States. But with their own government implementing similar industry incentives, which are also resulting in a building boom, unprecedented demand has soaked up much of the timber that would usually be exported for domestic purposes.

Local builders are consequently increasing their demand for Australia’s limited homegrown supplies, which have been gravely affected by the recent bushfires.

This stress on Australia’s timber supply has highlighted the fact that there hasn’t been an increase in Australian softwood plantations for more than 20 years, while demand for this valuable commodity has continued to increase.

Last year the Victorian Building Authority recorded the highest level of building permit approvals in the past two decades, issuing 10 per cent more building permits in 2020 (113,430) than in 2019 (101,998).

The government is expecting the building industry to be a key power tool in Australia’s economic recovery, but without the supply of essential materials, this is a frustratingly blunt tool.

In late September, the federal government announced a $15 million investment to alleviate the acute timber shortages and “safeguard the viability of builder and tradie businesses around the country”.

Denita Wawn, chief executive of Master Builders Australia, says that one measure, “subsidising the transport of salvaged timber from plantations on bushfire-ravaged Kangaroo Island to timber mills with immediate capacity in South Australia and other states, is elegant in its practicality”.

However, Kate Henry is sceptical of Band-Aid solutions. “OK great – throw $15 million at Kangaroo Island to extract timber quicker but that pine plantation is likely working on a farming method where you plant, grow and strip … so, if you take all of that out now what’s the plan for the future?

“It’s not sustainable. What about the next 10 years?”

Although the government investment is a welcomed reprieve for many, there are those in the industry, like Henry, who speculate that the supply outlook isn’t looking much brighter.

The Australian Forest Products Association warns that by 2035 Australia will be 250,000 house frames short of demand. Or, as they describe it, “A timber production shortfall equivalent to the combined size of Geelong and Newcastle.”

CategoriesNews

Buyer frenzy eases as new property listings hit seven-year high

Megan Neil 8 Dec 2021

New listings of properties for sale across Australia have jumped to their highest level in seven years, giving buyers more options and soothing some of the property buying frenzy.

November marked the peak of the spring selling season this year, with the latest PropTrack Listings Report showing new listings on realestate.com.au rose 12.1% to the highest level since 2014.

“Property market activity continued to soar in November as sellers made up for lost time after lockdowns,” PropTrack economist Angus Moore said.

New listings in the capital cities rose 12.5% in November to reach their highest level in a decade, while regional areas had an 11.3% rise to a five-year high.

Mr Moore said it was a strong result for November, with this year’s peak pushed back by the delayed start to the spring selling season due to COVID-19 lockdowns in Australia’s two biggest cities and Canberra.

He said the very tight competition buyers had faced should start to ease thanks to the new supply coming to the market.

“We’re seeing more options for buyers to choose from and the urgency for buyers is maybe starting to ease a little.

“We’re still seeing properties sell very quickly though.”

Mr Moore noted PropTrack measures of buyer demand remained high but eased slightly in November.

According to PropTrack economists, there are early signs the extreme seller’s market is starting to slowly shift towards more balanced conditions as an increased supply of new listings gives buyers more choice.

Raine & Horne Group executive chairman Angus Raine said the influx of listings stock has cooled the market.

“The buyer pool is still very deep, but admittedly the buyers have more choice now,” Mr Raine said.

Market conditions to remain strong in early 2022

Mr Moore said selling conditions are still strong, although property markets will be quieter during December and January as buyers and sellers pause for the Christmas and New Year break.

“However, we may see a busier December than typical as activity spills later into the year because of the lockdown-delayed start to the spring selling season,” he said.

Mr Moore expected the strong market conditions to continue early next year, with buyer demand to remain high but not at October’s record levels.

“When we were coming out of lockdown we had a lot of pent-up buyer demand facing into a really limited stock of properties for sale,” he said.

“That’s going to ease a little in the new year.

“Selling conditions are likely to stay strong but may start to soften a little from the dominant levels we’ve seen in recent months.”

Mr Raine said Raine & Horne offices were still busy listing properties now, with activity particularly strong in the leisure belt around capital cities – semi-regional locations about two to three hours from a capital.

Mr Raine expected the Christmas/New Year slowdown to be very brief this year.

“I think this is going to kick off in the first week of January again,” he said.

“There will be a higher volume of listings next year which will test the market, but the market’s so resilient and the buyer pool is significant, so it will certainly slow things down but nothing to be worried about.”

While many economists expect property price growth to slow in 2022 and dip in 2023, Mr Raine expected the boom conditions to continue for some time due to low interest rates.

“There’s definitely going to be a long tail to this boom – two to three years at least,” he said.

More choice softens buyer FOMO

The market remains competitive but conditions are noticeably better for buyers, according to Victorian buyer’s agent and Real Estate Buyers Agents Association of Australia president Cate Bakos.

“Instead of being white hot it’s red hot,” Ms Bakos said.

“The crazy conditions have eased a little bit and compromised properties aren’t all selling.

“On a quality property you still have to fight for it.”

Ms Bakos said with FOMO no longer at full throttle, buyers were being more discerning about properties compromised by factors such as location, a busy road or bad floorplan.

“There is still FOMO but most buyers who are active in this market have missed out on less options or less negotiations. Their chances of success have increased.”

Ms Bakos said the heat of the buyer interest in property had come out, with people were also thinking about more than property now that lockdowns had ended and heading into Christmas.

“We’ve also got buyer fatigue. If someone feels like they’ve been searching all year and it’s been fruitless, they’re really tired of it now and they’re just saying ‘we’ll leave it for now and come back next year’.

“The buyer pool is a little bit shallower and a little bit easier for buyers to navigate, so I’d recommend to anyone don’t give up now, keep fighting all the way to Christmas Eve because the conditions are probably the best they’ve been.”

New listings reach multi-year highs in cities

New listings rose to multi-year highs in nearly all capital cities in November, giving buyers across the capital cities access to the biggest stock of properties available for sale this year.

“This is welcome respite for buyers, who have been faced with few listings and tight competition throughout the year while lockdowns limited property market activity,” Mr Moore said.

Hobart recorded the biggest surge in new listings in November with a 42.4% gain, reaching the highest level since the pandemic began.

“New listings will be a welcome relief for Tasmanian buyers, who have been facing limited listings for some time,” Mr Moore said.

Buyers in Adelaide enjoyed a strong spring selling season peak as new listings jumped 23.9% to their highest level in seven years.

New listings in Canberra gained 22.1%, the third straight month of substantial increases as sellers hit the market after lockdowns.

Perth buyers enjoyed the highest level of new listings since 2014 after a 14.8% increase in November, while in Brisbane newly-advertised properties for sale rose 14.4% to the highest level in three years.

New listings rose 11.2% to a record level in Melbourne, as its property market continued to make up for lost time after lockdowns.

Sydney had an 8% increase, reaching the highest level since 2015 and capping off four straight months of strong growth.

New listings in Darwin were broadly flat in November (up 0.4%), but Mr Moore said conditions for buyers remained much better than in 2020.

Overall supply remains below pre-COVID levels

Despite the surge in new listings in November, the overall stock of properties for sale remained low compared to pre-pandemic levels.

“The long periods of restricted activity and lockdowns, coupled with high levels of buyer demand, mean that the total stock of properties available for sale is low compared to previous years,” Mr Moore said.

The wave of new listings drove a 6.9% lift in total listings nationally in November, the third straight month of increases.

Overall listings were up by 9.0% in the capital cities and 4.1% in regional areas.

Mr Moore said total listings nationally remained 20% lower than pre-pandemic levels and were down nearly 40% in regional areas, with the ability to work from home driving strong demand for regional properties.

“We’ve seen the number of properties that are available on the market decline and there hasn’t been a response in terms of people leaving regional areas and selling up, or building new houses in regional areas, to compensate for that increase in demand,” Mr Moore said.

CategoriesNews

Rental prices tipped to rise as vacancies hit multi-year low

Renters are facing fewer options when it comes to choosing their next home, with vacancies at their lowest level in years and expected to drop further as international borders reopen.

Competition for rentals – which held the national vacancy rate at a multi-year low of 1.5 per cent in November – is expected to increase, along with prices, as international students and migrants return to Australia, experts say.

It is already a landlord’s market in most cities, said Nicola Powell, chief of research and economics at Domain, with vacancy rates in Perth (0.5 per cent), Hobart (0.3 per cent), Adelaide (0.4 per cent) and Brisbane (1.2 per cent) at multi-year lows – the rates holding steady or falling marginally in each location last month.

Domain figures show the vacancy rate also fell slightly in Melbourne for the third month in a row, from 3.1 per cent in October to 3 per cent in November, and is now at its lowest level since June 2020 – although it was still the highest of the capital cities and the only one above pre-pandemic levels.

Vacancies increased marginally in Sydney, from a rate of 2.2 per cent to 2.3, but this was still the city’s second lowest rate, after October, in more than three years. They also rose in Canberra and Darwin to 0.9 per cent.

Tenants were operating in very tight markets, except for Sydney and Melbourne, Dr Powell said, which had been the hardest hit by the pullback in demand from international students, migrants and visitors during the pandemic and would likely see the most significant change as borders reopened.

“It will probably have a pretty dramatic impact on the vacancy rate … once we start to see a flow of international arrivals,” she said. As state and international borders reopen and economic conditions improve, rental demand will likely climb, reducing the already limited proportion of vacant homes in many cities and pushing prices beyond already record highs, Dr Powell said. This could make it harder for lower income earners to be considered for properties.

“In that kind of market, a landlord will want to pick the crème de la crème of tenants … a landlord can be choosy, more particular of whom they’re letting in, and that makes it really tough, particularly for somebody on a lower income, or perhaps in a less stable job,” Dr Powell said.

While increased investor activity – with the value of investor loans recently reaching its highest level in more than six years – would help boost the supply of rentals, it would also leave more aspiring first-home buyers renting for longer, she said.

The majority of experts expect rental prices to increase significantly as international borders open, the latest monthly Finder RBA Cash Rate Survey found, with 22 of 30 experts backing significant rental hikes.

Among them was Mathew Tiller, LJ Hooker Group’s head of research, who thought the return of international students and new arrivals would put downwards pressure on vacancy rates and upwards pressure on prices – particularly in inner-city apartment markets.

Demand from local tenants was also expected to lift, Mr Tiller said, as those renters who went back to the family home during the pandemic moved out again, workers returned to the office and students returned to face-to-face learning. Other tenants, after months of living with housemates in lockdown, were deciding to leave sharehouse living and move into smaller apartments to make the most of lower prices.

“Now that some of the smaller investment stock has seen affordability [improve] … they’re deciding I can actually afford that on my own,” Mr Tiller said.

Of the capital city regions that recorded the largest declines in vacancy rates last month, half were in Melbourne, with the CBD topping the list with a fall from 5.8 per cent in October to 5.1 in November.

However, the CBD vacancy rate remains one of the highest in Melbourne, with renters still finding more choice and less competition than in other parts of the city.

Leasing agent Daniel Freeman, of Hodges South Melbourne, said the inner-city apartment market was still proving quite tricky for landlords, with properties taking about six weeks to rent, and landlords still slashing prices – some by as much as $100 a week – to get tenants through the door.

The closure of international borders, an increase in first-home buyer activity and renters returning home to live with family had all reduced demand for properties, he said. Meanwhile, the surge in short-term holiday rentals converting to longer-term rentals had increased supply.

“Unless the prices are attractive, [tenants] aren’t wanting to jump on because they know there is not going to be a lot of competition out there,” Mr Freeman said.

While demand was expected to increase in the months to come, he expected to see a gradual shift, noting people were still cautious of the potential for future border closures and lockdowns.

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