This building crisis is sowing the seeds of the next boom.
So I don’t know if you’ve been following this story, but there’s a building crisis brewing in Australia.
Actually, it’s been on the cards for some time now, but it seems that things are coming to a head, with some major builders and developers going bankrupt.
News.com.au was running a story last week about a number of large Perth developers joining the queue in the morge:
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.
These aren’t small Mum & Dad developers. These are some major players working on major projects.
Of course, when you get collapses like this, it flows on down the line, with a lot of contractors and subcontractors wearing the pain. Apparently the whole industry is in trouble:
“Everyone assumes that everyone’s making bucket loads of money,” Davies said, noting city skylines are often dotted with cranes, and governments talk up the accelerated spending on infrastructure as a spur for economic growth.
“The reality is at a higher level the industry is not in good shape,” he said. “In fact, probably the more work [contractors] have, the more exposed they are to these risks.”
The key thing here is costs. Costs have completely blown out with huge spikes in material prices. Corelogic reckon the Construction Cost Index is running well ahead of inflation, and is at the highest rate of growth since 2001 – a year that was impacted by the introduction of the GST.
Residential construction costs have risen by 2.4% over the three months to March 2022…
Annually, the national CCCI increased by 9.0% over the year to March, the highest annual growth rate since the 12 months to March 2001 (10.2%) which included the impact from GST being introduced…
Timber costs continue to rise, with cladding, decking and other timber items affected.
Steep rises in metal prices are now affecting the market, with structural steel, fixings and metal components hit hard.
We have continued to see volatility in the rest of the market, with imported products the most vulnerable due to elevated shipping costs.
So this isn’t about the management of these companies. No one could have predicted that material costs would have evolved the way they have.
But it means good companies are going under, and those that remain are struggling to turn a profit.
That means that many developers are turning away jobs, just as the HomeBuilder grant ends – creating a substantial down turn in the number of homes being built.
When you look at building approvals, so far this year, approvals are well below what you would call ‘normal’ levels.
So what you have here is the makings of a housing crisis. Sorry, we’re already in one aren’t we?
Well it’s about to get a lot worse.
The Australian housing shortage is about to take on epic proportions.
And that in turn will light a fire under house prices.