Builders face mounting challenges

The high price of materials and labour is constraining new dwelling supply

Construction challenges

Although demand for residential property remains high, the construction industry is going through a tough time. Contrary to what people might think, this has been a very challenging period for developers in Australia, with the price of materials and labour rising sharply.

Recently we have seen Probuild head into administration, while Condev and Privium have also stumbled into liquidation, leaving many live projects unfinished and contractors out of work. In Perth, New Sensation Homes and Home Innovation builders are among the latest casualties within the past week.

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The construction sector is one of the most important industries in the country, with over 1.15 million employees directly engaged in the sector, so this is a key cornerstone of the Australian economy.

Construction costs have continued to increase in the early part of 2022, so there is little respite in prospect for a beleaguered sector, especially with the Reserve Bank telegraphing an increase in the cost of financing.

Construction costs have continued to increase in the early part of 2022, so there is little respite in prospect for a beleaguered sector.

More insolvencies in the post

Further insolvencies will inevitably follow later in 2022. In reality, we’ve been through a couple of years when insolvencies in the construction sector have been artificially low, but now the impacts on supply of the global COVID restrictions are coming home to roost. We expect to see construction insolvencies making up for lost ground and rising significantly over the year ahead.

Figure 1 – Construction insolvencies by state
Figure 1 – Construction insolvencies by state

Unfinished business

There is still a large pipeline of residential construction to be worked through. Largely thanks to the government’s stimulus packages there were still more than 100,000 detached homes under construction all around the country at the end of 2021, so there is still a huge pipeline of residential work due to being completed.

Figure 2 – New dwellings under construction
Figure 2 – New dwellings under construction

However, given the domino effect of construction firms going to the wall, it seems increasingly likely that many of the higher-density projects will not be completed on a timely basis. This comes at a time when rental vacancies are approaching all-time lows, and the opening of the international borders is facilitating more travel into the country.

The next formed government will face a major challenge in delivering enough new dwellings to meet the increasing demand for rental housing over the coming few years, and we expect rents to rise significantly.

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