Australia’s housing pipeline swells as builders go bust

The Reserve Bank of Australia’s August Statement on Monetary Policy (SoMP) showed that the pipeline of houses under construction has swelled to all-time highs on the back of rising costs and supply constraints:

The Australian economy… [is] likely to be supported for at least the next year by the large pipeline of detached house construction projects that are currently underway. Capacity constraints and weather-related disruptions have limited the pace at which this pipeline can be worked down…

The increase in detached housing approvals in 2021 resulted in a large pipeline of residential construction work (Graph 2.14). This pipeline will sustain construction activity even as demand for new housing eases, as indicated by new home sales, greenfield land sales and dwelling approvals.

The pace of construction activity has been constrained by supply chain issues, and capacity utilisation within the industry has been elevated for some time. Information from the Bank’s liaison program suggests there have been shortages and significant cost increases for labour and materials. Construction delays have been exacerbated by widespread rainfall along the east coast and absenteeism due to the Omicron outbreak. Rising costs have compressed margins on fixed-price contracts, with some firms expecting more insolvencies in the industry.

The irony here is that Australia’s home builders have more work than ever, but are also falling into insolvency at an alarming rate.

Already this year there have been dozens of major home builder collapses. IBISWorld has also forecast that thousands of builders will collapse in 2022-23, with the number of firms “contracting for the first time in a decade”:

Thousands of Aussie home builders to fail.

The reason is because the Morrison Government’s HomeBuilder stimulus pulled thousands of buyers into the new home market at fixed price contracts. Pandemic-related supply chain issues then caused building input costs to rocket, which has pushed builder margins into negative.

As illustrated in the next chart from the ABS’ June quarter CPI release, new dwelling prices soared 20% in the 2021-22 financial year, easily beating the 14% rise when the GST was introduced in 2000:

Extreme cost inflation drives new dwelling prices higher.

The upshot is that home builders have never been busier, while also bleeding money at an disturbing rate as their costs exceed revenue.

The inevitable result is that the procession of builder collapses will continue, despite the economy being supported by ongoing strong activity levels.

It is a “loss-making boom” for the industry.