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.
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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.
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 being the most lenient of the eastern states.
The Master Builders Association estimates that prices for some key materials have increased by as much as 4.2 per cent in the past quarter.
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," she added.
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," Mr Reardon said.
