The ‘profitless boom’ sends homebuilders into insolvency hell

In normal times, the Australian homebuilding industry would be in poor health. This week’s March quarter housing construction data from the Australian Bureau of Statistics showed annual housing approvals and starts trailing record highs, while completions are at cyclical lows:

Housing approvals and starts are booming, completions are plummeting.

The combination of these factors has pushed the pipeline of homes under construction to record highs, according to the Housing Industry Association:

Houses under construction

Record number of houses under construction.

So why have there been dozens of major construction meltdowns this year when homebuilders are busier than ever? And why did IBISWorld forecast thousands of homebuilders to fail in 2022-23, with the number of companies “contract for the first time in a decade”?

House building prospects

Thousands of home builders fail during this exercise.

The reason for this is that the Morrison government’s HomeBuilder stimulus package has drawn thousands of buyers into the new-build market with fixed-price contracts. Pandemic-related supply chain issues then drove up construction input costs, causing builders’ margins to turn negative.

The latest CoreLogic Cordell construction cost index found that construction costs climbed 10.0% in fiscal year 2021-22, the highest annual growth rate on record outside of IPO GST:

Construction cost index

Skyrocketing construction cost inflation.

Worse still, CoreLogic has warned that construction costs could rise further given “a lack of materials, high fuel costs and broader inflationary pressures”.

The result is that Australian homebuilders have never been busier, but are also losing money at an alarming rate as their costs exceed their revenues.

The inevitable result is that the conga-line of builder meltdowns will continue this fiscal year, and the situation facing the industry will get worse before it gets better.

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