Construction companies are struggling with costs.
But that shift – which created many of the smaller households Ellis identifies – now appears to be in reverse, Tsolidis Noyce says. “All of last year, particularly from September to December we saw a huge wave of people moving out of apartments they got quite cheaply.”
Staff was one. At the start of last year, after his landlord raised the rent on the apartment to $300 a week, he decided to move back into his shared house.
Breaking point
Still, the arrival of larger households in the private rental sector could offer an unexpected, but welcome, escape valve for the embattled construction sector which is at breaking point trying to keep up with demand for houses. Demand is only expected to increase as Australia’s international borders reopen and immigrants return.
“Just as the increase in household formation offset the 200,000-household reduction in household demand from immigrants, it’s likely to go the other way when immigrants start returning,” says AMP Capital chief economist Shane Oliver.
“The big unknown is which trend moves faster? If immigrants come back quickly, it would probably offset or overwhelm the decline in household formation that’s likely to occur, or the increase in household size that’s likely to occur.”
Current workbooks are already putting companies at breaking point.
Construction times have blown out. The Housing Industry Association this week said the average time to build a house had risen by almost half to 12.2 months.
Under pressure
Newly appointed Treasurer Jim Chalmers this week acknowledged the pressures on companies in the frenetic market where new detached housing starts rose in the September quarter to a record 149,515, more than one-third above the two-decade average figure of 110,122 homes.
“Some of the conversations that I’ve been having over the last two days, are about the quite extreme conditions that a lot of builders are dealing with, because they might have signed contracts 12 or 18 months ago,” Chalmers said in his first post-election press conference.
“So that is, I think, one of the really pressing problems that we have right now, one of the consequences of skyrocketing inflation, particularly when it comes to building materials and other important parts of the supply chains … I recognise that challenge, and we will work with them to the extent that we can.”
Costs rose at the fastest pace in 21 years in March at the same time as many home construction companies are committed to fixed-price contracts with customers with little wriggle room on prices.
And costs are expected to keep rising. Building materials supplier James Hardie Industries this month said it had raised its prices in total by 9 per cent in the past six months alone. Economists say they will remain permanently higher.
Boom to bust
The building sector suffered another blow this week when Queensland-based builder Pivotal Homes went into liquidation. The Gold Coast builder had 103 contracts under construction and a further 177 contracts on which it hadn’t yet started work when it went into liquidation on Thursday.
Like fellow Gold Coast builder Condev, which went into liquidation in March, Pivotal Homes boss Michael Irwin could see he was going to drown in a sea of red ink as surging building costs evaporated the profit from his fixed-price contracts and pulled the plug before it got worse.
“What he has recognised … is the company is likely to be insolvent at some stage in the future because of the huge increase in prices,” said Irwin’s lawyer, Derek Cronin. “Some contracts have really long tails and builders end up bound to complete construction in cases where the cost base has increased to such that they’re operating at a loss.”
The pressures on the sector are set to persist for the next few years, not just from higher materials and labour shortages, but also from higher interest rates as borrowing costs rise.
Ironically, the difficulties the construction industry faces may be putting a floor under the economy, as the delays in work – because of shortages of workers and materials and worsened by floods in NSW and Queensland – are actually prolonging the pipeline of work.
Economists last week said the declines recorded in house-building over the March quarter reflected an ability to complete work, rather than a loss of demand, and said the 0.9 per cent decline across construction in total would have only a muted effect on this week’s upcoming quarterly GDP numbers.
With John Kehoe
