[+] HomeBuilder a Trojan Horse for Builders

HomeBuilder has been a trojan horse for the residential construction sector as it grapples with growing pains associated with the unprecedented surge in demand. More than 135,000 applications were made for the federal government stimulus package, with Victoria taking up the lion’s share of about 30 per cent. Billed as the saviour of the nation’s economy, it is undeniable that HomeBuilder helped to kickstart Australia’s economic recovery in the wake of the pandemic. But it has created the perfect storm. Building approvals have begun to stall , Australian housing construction costs are at an all-time high , inflation is on its way up and pressure is mounting on interest rates. Economists are warning greenfield developers and residential construction companies will feel the impact of the pull-forward effect over the longer term. Surge in demand creates future hangover ANZ head of Australian economics David Plank says the HomeBuilder program has brought forward construction activity but it is not responsible for the rapidly escalating house prices across Australia. Plank says supply and demand forces are at play in the housing market that are driving prices sky-high in addition to inflationary pressures, as opposed to an artificial stimulus-led housing bubble. ▲ Economists are predicting a long-term slow down in building activity following the pull-forward of residential work through the HomeBuilder stimulus package. “It definitely had an impact, we saw a dramatic surge in building levels,” Plank says. “People that would have built a house in the next few years thought, ‘we should do it now’, which tends to bring forward that activity. It would have made sense that building approvals would have picked up, as is always the case with these sorts of subsidies.” But with the glut of work, supply chain issues and labour shortages the bottleneck has been challenging for construction firms looking to capitalise on the pent-up demand. National construction costs ^Source: Corelogic Cordell Construction Cost Index Plank says the rub will come in the form of a slow-down in work in the longer term. “There will be less activity in the future which we’re now starting to see, and it will decline further. Residential activity has started to slow,” Plank says. “We think interest rates will get up to the 1s. We know that as interest rates go up that it will impact spending and the housing market quite materially.” The rubber has already started to hit the road with some big name residential building companies going into receivership. Builders suffer bottom line blowouts Queensland-based builders Privium and BA Murphy have gone into liquidation. BA Murphy reportedly owed almost $11 million to about 550 creditors while Privium likely owed more , according to administrators FTI Consulting. Privium Group’s director Robert Harder attributed the collapse to the effects of the pandemic on operations, which led to a blowout in lead times and restrictions on work sites. The administrators say the costs of construction outpacing revenue growth had also played into the demise of the builder. Melbourne-based high-rise builder ABD Group went into liquidation with outstanding debts in excess of $50 million, while Hobart-based Inside Out Construction folded in November, and Tasmanian Constructions, a franchisee of Hotondo Homes, has entered liquidation with 80 contractors and 40 customers left out of pocket. CreditorWatch chief economist Harley Dale says the construction industry has grappled with the challenges of the pandemic and has the highest payment arrears at 12.4 per cent across the sectors monitored. “The construction industry has been particularly hard hit by the pandemic,” Dale says. “The industry has some unique payment structures which are contributing to a high rate of arrears. If the industry can work through its supply chain disruptions and blowouts in the cost of materials such as timber, it will be in good stead.” Construction cost escalation strongest in 17 years Commsec senior economist Ryan Felsman says securing building materials and labour is difficult in the housing market at the moment. “A combination of strong demand for new homes and renovation work due to record low interest rates, the government’s HomeBuilder stimulus, and state government grants have generated strong building activity,” Felsman says. “Overall building construction costs surged 2.9 per cent in the December quarter and were up a massive 7.5 per cent at the end of December when compared with the previous year. A scarcity of skilled workers and a surge in building materials costs due to supply chain and transportation bottlenecks, have contributed to soaring building construction costs.” Felsman says input prices to house construction surged 12 per cent over the year to December as supply constraints, stock shortages and surging freight costs bite into bottom lines. He said key building materials including timber and joinery had increased 18.4 per cent over the year, while aluminium windows and doors have increased 13.2 per cent. ▲ Timber prices are up more than 18 per cent as supply chain issues continue to bite into builders&#x27; bottom lines. Corelogic’s Cordell construction cost index for the last quarter of 2021 showed that national construction costs had increased 7.3 per cent over the year, the highest annual growth rate since March 2005. Corelogic director of research Tim Lawless says supply chain disruptions would continue to create upward pressure on the cost of construction. “There is a significant amount of residential construction work in the pipeline that has been approved but not yet completed,” Lawless says. “With some materials such as timber and metal products reportedly remaining in short supply, there is the possibility some residential projects will be delayed or run over budget.” Cordell data shows that cost increases are still being driven primarily by timber (mostly structural timber). Other segments of the market also remain volatile, with increasing pressure on metal costs. Dwelling approvals: December 2021 Dwelling type December 21 Monthly change YoY change Total dwellings 17,698 8.2% -7.5% Houses 10,444 -1.8% -21.3% Units 7008 27.5% 24.5% ^Source: ABS Building Approvals December 2021 Building approvals down 21.3pc in 12 months The Australian Bureau of Statistics released building approvals data for December, highlighting the demise of house building, which dropped 1.8 per cent over the month, while unit approvals skyrocketed 27.5 per cent. The drop in house build approvals in December follows a 1.6 per cent contraction in November, and a record 21.3 per cent decrease over 12 months. Reserve Bank of Australia governor Philip Lowe acknowledges the stronger GDP and labour market outcomes have translated into “higher inflation than we were expecting” . “We had expected underlying inflation to be 1.25 per cent over 2021, yet the actual outcome was 2.6 per cent,” he says. “Headline inflation was higher still at 3.5 per cent, boosted primarily by a sharp increase in petrol prices and the cost of constructing new homes.” While the RBA maintains a dovish stance on monetary policy Lowe says while the omicron variant outbreak has delayed the recovery of the economy he is confident it has not been derailed. You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more .

[+] HomeBuilder a Trojan Horse for Builders

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