Home builders are being warned to expect higher costs and lengthy delays until at least 2023 as a perfect storm of financial headwinds sends shockwaves through Australia’s residential construction industry.
Rising interest rates, shortages of materials like timber and steel, and surging demand for new housing during COVID-19 are being blamed for an almighty crunch putting builders under pressure.
And with the number of outstanding construction projects still rising, economists warn the storm is unlikely to subside any time soon, raising fears that some companies will be pushed to the brink.
On Thursday, Metricon Homes, Australia’s largest residential construction firm, became the latest high-profile builder to face questions over its finances amid reports it was on the brink of collapse.
Acting chief executive Peter Langfelder – who took over after former boss Mario Biasin died suddenly earlier this week – denied growing rumours on Thursday that Metricon was about to go under.
It came after a meeting with the Victorian government on Thursday in which Mr Langfelder reassured Treasurer Tim Pallas that Metricon was in good financial health and remained completely solvent.
Metricon is building $195 million of social and affordable housing for Victorian taxpayers.
Metricon denies rumours
Mr Langfelder reassured staff in an email on Thursday that Metricon would continue to “operate as usual” and pay all its creditors on time.
“All the stories of impending doom are untrue,” he said.
“We have a strong and positive relationship with our bankers and all facilities are in term and with headroom.”
Metricon reported more than 6000 new home starts in 2020-21 – about 1500 more than in 2019-20.
About 4000 homes are currently under construction, according to company financial reports.
After their meeting on Thursday, Treasurer Pallas said he understood builders are facing pressure due to higher costs, and pledged to work with the construction industry to help address the challenges.
“Metricon informed the government that all its trade creditors have been paid in full and on time and Metricon expects this to continue,” Mr Pallas said in a statement.
Metricon had previously sought to renegotiate some fixed-price contracts it had signed with customers during the pandemic, to increase prices to reflect the higher cost of materials.
Rumours began swirling about its finances several months ago after several large building companies went under, including commercial construction giant Probuild.
‘Unprecedented’ construction challenges
Phil Dwyer, a builder who’s worked in the industry for five decades, said he was unsurprised to see speculation about the financial health of building giants like Metricon, given the “unprecedented” challenges the industry has faced during the pandemic.
“In my 50-odd years in the building industry, I’ve never encountered the cost increases we’ve seen in such a short period of time,” he told TND.
“I don’t see the situation improving over the next six months – costs are going to escalate more.”
Builders are facing huge cost increases for key inputs like timber and steel amid global supply chain disruptions and elevated demand for new homes, Mr Dwyer explained.
Housing construction costs soared 13.7 per cent over the year to March, according to ABS data.
IBISWorld industry analyst Victoria Baikie said higher timber prices (up 20.6 per cent over the past year) and metal prices (up 16.2 per cent) are key challenges for builders, which have been exacerbated by a severe shortage of construction workers.
“There’s a massive backlog of projects,” she said.
“Especially with rising interest rates and fuel costs, these challenges are going to worsen further.”
Expect higher costs, big delays
Tim Hibbert, head of property and building forecasting at BIS Oxford Economics, said consumers should expect these problems to flow through to project delays and higher building costs.
“It’s a very volatile environment. There’s a pretty big gap between the supply of and demand for required inputs – both on the labour side of the ledger and on the materials side,” he said.
“That gap between what’s required to get work done and what’s available is creating stress, causing delays and is also putting upwards pressure on prices.”
Mr Hibbert said the construction backlog will continue growing until at least next year, meaning there’s no relief in sight for construction firms or home builders.
“We expect more major business administrations moving forward. There will basically be a shakeout across the industry,” he said.
Patrick Coghlan, chief executive of credit bureau CreditorWatch, said the rate of insolvencies in the sector has remained “fairly stable” to date, but warned there’s much more pain to come.
“I’m more concerned now than I have been in the past two to three years, without a doubt,” he said.
‘Common sense should prevail’
Mr Dwyer advised home buyers to avoid being “hard nosed” and to seek a compromise with their builders if they are facing financial pressures.
“Common sense should prevail in these circumstances,” he said.
“The very last thing a customer wants is their builder to go bust because that’s a nightmare.”
Mr Dwyer said customers should be willing to accept higher costs, even if they had agreed to a lower price with their builder in the past, as the pandemic and war in Ukraine had sent unexpected shockwaves through the global economy.
The alternative is trying to pursue a builder through the legal system, which would be akin to drawing blood from a stone, he said.
Builders should also “be honest and transparent” with customers about their finances, Mr Dwyer said.
