Article by Jason Janssen, HBAG Chairman
While Governments sleep…
When 3 reputable Builders enter administration in a week, it’s long past time to look at the causes of the biggest crisis in the history of the home building industry. But first, it’s important to understand that the “sketchy”, “fly by night” builders collapsed many months ago often in a blaze of bad publicity that cast every builder in a bad light. Now, long established and reputable builders are under extreme pressure and, with every collapse, home buyers are left with unfinished homes, spiralling costs and insurance schemes that don’t cover costs.
None of this happened overnight.
Cast your mind back to 2016. The Home Building Industry – at the tail end of a boom – was busy completing around 25,000 homes.
That’s when the industry started its slow decline. Building approvals fell from 25,420 in 2015 to just 13,570 in 2019. Prices were further depressed when many of the volume builders, competed for market share and the industry started to cannibalise itself. It went from having the capacity to build more than 25,000 plus homes in 2016 to about half that number.
There was a seismic shift of labour, including many trades, to the resources industry never to return and many suppliers and builders wound down their businesses to serviced dramatically reduced demand.
Hindsight is a wonderful thing and it is now clear that this is when Government should have stepped in to support the industry averting many of the issues that worsened unchecked. Instead of acting to add many thousands of new homes (that they are now talking of building) when they were needed, the government did nothing.
The collapse of the industry’s capacity to build homes – the canary in the coalmine – was ignored and it was not until 2019, after years of decline, that the Building Industry started to recover.
By 2019 the building approvals seemed to have turned the corner and there were nascent signs of recovery.
Then came COVID-19.
It’s quickly forgotten now, but then there were fears that entire economies might be decimated. Well intentioned Government Grants were hastily announced to assist home buyers but, more importantly, provoke the recovery of the Home Building Industry. The $25,000 Homebuilders Bonus with a further $20,000 Building Bonus proved to be a disaster. The Government Grants required work to start in 3 months of approval and, suddenly, commencement skyrocketed back to 25,000.
The fragile industry in tentative recovery but with still diminished capacity was suddenly confronted by a tidal wave of demand. Now, having lost 40% of its workforce during the long slow years of decline, there wasn’t a hope in hell that the houses could be built in a reasonable time. The 3 months to start rule went out the window and was extended into months and then years.
So, in the absence of assistance when it was needed, the Government’s massive over correction put pressure on demand that saw prices quickly escalate to levels never before seen. In previous booms, there were price rises of about 5% a year but now there was something different. Now, prices escalated around 25% a year and the straitjacket of the Home Building Contracts Acts (1991) (the Act) meant every builder started losing money because the act meant fair and justified price increases could not be passed on.
Builders had no choice but to try to absorb these massive price rises often imposed without consultation by suppliers who were not bound by the act. Builders’ cash reserves were quickly depleted after 2 years of price increases and delays due to a serious lack of materials and labour. Builders resorted to selling assets to fund their businesses and banks refused applications for credit quoting accumulated losses and simply adding to the downward pressure.
The wrongheaded view that the Act, by preventing price rises, was protecting the home buyer, gave way to the realisation that unfinished homes, spiralling costs, inadequate insurance and builders collapsing was the worst of all worlds for everyone – builder and buyer.
Confr0nted by loss making “legacy” contracts about which they could do little, Builders resorted to contracting new work at much higher prices. That was the only way the impact of the Act could be countered and it was then only natural that these new, profitable jobs were prioritised.
The result was a Perfect Storm.
Older, government stimulus jobs were trickle fed stretching completion dates out months and then years. Home buyers waiting for their homes to be finished and often repaying home loans clogged up the rental market where fewer homes meant much higher rents and, at the bottom end, homelessness at never before seen levels. Then in another aggravation, Airbnb took a further slice out of the rentals that might otherwise have been available.
Today, many families are still waiting for their homes to be completed; Builders struggle for the funds to finish them knowing they will that they will lose money on each one and while, eventually, buyers will move into homes valued at much more than they paid, many builders will continue to struggle after being almost wiped as a result of poorly managed Government Stimulus and an Act that is not fit for purpose.
There were no winners from a boom that ended up being a massive bust.
The community confronts a crisis not previously seen and the Government needs to step up to take responsibility by adopting a proposal:
1. To Review and amend the Home Building Contracts Act which is not fit for purpose in the present environment. (as discussed with DMIRS – Building and Energy)
Areas to be reviewed include:
- Part 9 (1) (a) – 45 days for Building Permit from Contract Signing date
- Part 10 – 6.5% maximum deposit. Due to the increased level of regulation, time and cost that Builders need to cover prior to works commencing on site the 6.5% Deposit is no longer sufficient and HBAG believes 10% deposit is appropriate
- Part 12 – PC or PS item – This has not been possible to comply with during the past 3 years due to spiralling Price Increases
- Part 13 – Price Increases – There is no provisions for Price Increases once works have commenced on site. There needs to be flexibility to protect Builders and home buyers when unforeseen and unprecedented circumstances arise
- Part 19 – Breach of Contract – There must be a way of clients terminating a Contract when the Builder fails in their responsibility. Prior to and during construction.
- Part 3A – Housing Indemnity Insurance should be discretionary for Contracts above $500,000
- Division 3A – 25GB – Indemnity Insurance to be reviewed – in particular, for Apartments and Developments which are not covered under the Insurance Scheme.
- Time Extensions – There needs to be an easy and as of right of notification to the client that the Builder is advising them of time extensions due to unforeseen delays. The past 3 years has been fraught with delays outside of the Builders control.
2. Reintroduce the SME Recovery Loan Scheme as quickly as possible; (this can be re-activated by Treasury as a matter of Urgency)
3. Making sure further Government stimulus must be directed through the builders and the trades to keep the industry afloat; (This will be managed by Treasury and other Authorities as required)
4. Developing an intelligent industry assistance package should address: (This will be managed by Treasury)
- The funding crisis resulting from 2 years of losses and that means No and Low interest loans
- Assistance for legacy and loss-making contracts resulting from the shortcomings of the Act;
- Indemnity schemes that work and don’t leave builders and homeowners high and dry; and
- The need for a much closer working relationship between the industry and government.
As an example, the federal government’s plan to build another 1.2 million homes is absolutely unrealistic. In this state, the builders can’t afford to finish the homes they have started and there’s no capacity to take on more orders.
5. Seeing that Trade Training is addressed and reshaped to produce skilled workers quicker.