Cost hyperinflation sends Aussie home builders bust

Last month, the Australia Bureau of Statistics (ABS) released Consumer Price Index (CPI) data showing that new dwelling prices soared by a record 20% in the 2021-22 financial year:

Extreme cost inflation drives new dwelling prices higher.

On Tuesday, the ABS’ dwelling approvals data for July revealed that the average cost of a new house has ballooned to $406,000, up $80,000 (25%) on its pre-pandemic level:

Hugh Hartigan, head of research at the National Housing Finance and Investment Corporation, said “the cost of several building inputs such as structural timber, plywood and timber windows have all increased by more than 30 per cent over the last year, reflecting the difficult supply constrained conditions builders and developers are working under”.

The above cost inflation inflation is the key reason why so many Australian home builders have gone bust this year.

Ultra-low interest rates and the Morrison Government’s HomeBuilder stimulus led to thousands of building contracts being signed at fixed prices. Then the cost of key building materials, such as steel and timber, skyrocketed on the back of global supply constraints. As a result, builder margins turned negative.

The end result is that builders are hard at work bleeding money at an alarming rate, pushing many into insolvency. It is, therefore, a “loss-making” boom for the industry.

The longer-term implications are worrying given it could leave Australia with a reduced building capacity at the same time as the Albanese Government ramps-up immigration (housing demand) to record levels.

Indeed, Hugh Hartigan, head of research at the National Housing Finance and Investment Corporation, believes the rapid interest rate hikes, high costs, and supply constraints mean there is “significant downside” to his forecasts for around 550,000 new dwellings over the three years to mid-2024.

It’s a disaster in the making.