July 17, 2023 by Dymphna

Housing construction is about to collapse

Yes, we have a shortage of housing. Yes, it’s about to get a whole lot worse.

I’m not sure people are really across how epic the housing shortage is going to be in 12-18 months’ time.

I mean, the Aussie housing market is already in a chronic shortage. There’s no stock on the market, and rental prices are soaring.

But it’s only going to get worse.

And that’s because the construction sector is in a world of pain. Soaring materials costs and a predominance of fixed price contracts is sending many builders to the wall.

Last week we saw data from the Australian Securities and Investments Commission (ASIC), which showed that 2,117 companies across the building and construction sector fell into external administration in the financial year to 18 June.

That number’s a full 75.4% higher than the previous year!

And the number of construction companies in administration was also more than double that of the next largest category, accommodation and food services, which reported 1058 external administrations in the financial year to 18 June.

And the steep run up in interest rates is only making the problem worse for builders who rely on credit to operate.

Not to mention the way higher interest rates are crimping demand.

Russ Stephens, co-founder of the Association of Professional Builders, reckons the outlook is dire:

“This slowdown is going to catch them out, and that’s the reason why we will see a lot more liquidations over the next six months – it’s going to get worse before it gets better”, Stephens said.

“The sales process can take up to six to 12 months for builders. We are seeing consumers in that process have second thoughts and sit back and wait and see what happens with builders, interest rates and inflation. We are also seeing the amount of new inquiries start to slow down as well”.

The one sliver of good news is that materials cost inflation is easing, although it’s still running at just under 10%, so it’s not really an improvement. Its just getting worse less quickly:

But then just when builders thought the end might be in sight, insurance costs have started soaring:

“Victorians will be slugged with a 43% increase to Domestic Building Insurance as the home building industry continues to feel the strain of surging cost and company collapses”, reports the Herald-Sun.

“The Victorian Managed Insurance Authority on Monday announced the increase to premiums, which will take place from September 1”.

“Housing Industry Association executive director for Victoria Keith Ryan said the decision to increase premiums for this insurance by 43% was a “blow for Victorian home builders and their clients”.

“Mr Ryan said the change would also squeeze the cash flow of home builders who were already struggling with rising costs of labour and materials”.

Yep. Ouch.

All of this is going to lead to the mother of all construction crunches.

Oxford Economics Australia have forecast that total building work will fall by a cumulative 21% over the three years to financial year 2025.

That’s a massive fall at a time where we actually need a massive increase.

And so you think the housing market is in shortage now?

Just wait. This is going to get crazy.