Building Industry Collapses

The building industry has witnessed another two large scale collapses in the last 10 days.

According to some in the industry, more collapses are likely in the next few months.

Reasons for building industry failures

The reasons sighted in the most recent collapses include:

1. Supply chain issues;
2. Rising cost of products and labour (inflation);
3. Reduction in funding appetite from banks and investors;
4. A slowing housing market;
5. Interest rate hikes and;
6. Fixed price contracts.

I’m not convinced the industry experts didn’t see some of this coming. 

There is information and data in there somewhere which should make builders and homeowners sensitive with what they do with their money. For example, speaking with builders I know, the recent interest rate hikes have cooled demand somewhat. Potential clients are waiting for interest rates to settle to create some level of certainty before they commit. 

Does that mean you should be giving people $50,000 discounts to win the next job? 

I don’t think so.

You have other problems if that’s the case. 

Whilst supply chain issues have indeed been a challenge, as has the increase in cost of materials, some in the industry say these pressures have in fact eased. 

What does this mean for future supplies?

This doesn’t help with where we are now of course. It is in fact only going to get trickier.

Home Owners Warranty (HOW)

Firstly, Home Owner’s Warranty (HOW) will only provide some relief to home owners where their builder has failed. 

Some of the pressures argued above will be passed onto the consumer now. The consumer will now need to deal with the price hikes in labour and materials and expected delays in the development of their home. This is a known fact. 

In my time in dealing with insolvent builders, in almost all cases the relief from HOW has not covered the additional costs to complete the original build. In some cases, the build has been varied down to accommodate the lack of funds.

There is also the assumption the consumer has received value for the money paid to the builder. This assumption does not hold true in cases where construction is in the early phases. During these phases, the builder has front loaded progress claims. As a result, the consumer loses the money they have effectively paid in advance when the builder fails.

Deposits will be lost.

I can’t help to think that HOW is not working as it should and in some cases is being gamed.

I am confident there is data in the HOW assessment process which would assist in identifying failing businesses.

The fact that the homeowner will be one of the losers should provide fertile ground for a reassessment between builder and homeowner. I can see a new world order where the builder should be able to negotiate with the homeowner on the rising costs because of the next, worse, alternative faced by the homeowner – a failed builder. 

In Porter Davis’ case, with over 1,500 homes under construction, that would be difficult. This could be achieved through some large-scale mandated mediation. 

Worth thinking about, especially if you are about to lose your deposit. 

Think about retirees who downsize and put a deposit down on a new fit for purpose build. 

There must be a better way.

Another conclusion to reach here is that bigger is not always better.

It doesn’t stop there. 

One of the strategies contemplated in Porter Davis’ case is for another builder to take over the work of uncompleted homes. 

In my experience, other builders are sympathetic and come together for the good of the sector to help resolve the work to complete. However, in the current climate we will see fewer builders capable of taking on further demand given the prevailing industry dynamics, unless of course the consumer pays a premium for the attention and is prepared to wait.

One prediction I am making is HOW will be under increasing pressure, which begs the question – is the HOW criteria working? There is a host of criteria applied by insurers when granting HOW. 1,500 houses under construction with a discount of $50,000 if you sign up is some math. 

Another prediction should the Seers’ views hold true about further collapses is, I suspect, some form of regulatory intervention with HOW.

Further Challenges in the Building Industry

Here is another challenge to play out. 

The additional cost will need to be funded by the consumer. Fixed price contracts are popular because those who fund the homeowner, the banks, want to ensure their loan to valuation ratio stacks up, that is, the banks want certainty as to the costs the borrower will face. In other words, a bank won’t lend to a borrower if they can’t fund the loan repayments. This is why you hear a lot of builders complain of slow paying customers when they have applied variations to the next progress claim. The bank is not funding that variation only the agreed fixed price contract, that extra must be paid from the homeowners’ ‘spare cash’ (I’m only talking about builds of around $1 million, higher cost homes have different bank criteria). 

Now if the homeowner has locked in a loan, they will need to fund the extra cost to complete the build of their home with ‘spare cash’. 

How do you recover from a lost deposit?

I can’t see loan to home valuation ratios changing given the flattening of the values in certain sectors of the housing market, thereby limiting equity redraws as a source of funding for homeowners.

Let’s not forget about the subbie and allied trades. 

Some trades take out insurance for bad debts and will recover their position, even if it is only in part. Others may have an opportunity to re-negotiate a position with the new builder once the fall-out settles. The rest will miss out. 

The suppliers of materials and labour are critical to the operation of the building industry. They are also the most vulnerable, particularly if you are working for a major player. Whilst you might get paid on time, that month you don’t get paid will hurt.

This has always been the case. This will always be the case.

During times where demand for services and materials exceed supply, the power in the industry dynamic sits with suppliers and labour. Given they are at the industry coal face there would be information and data that could be used as a proxy for impending disaster.

It is time for this sector to become more proactive.

These large-scale collapses should not or at least be better managed because the system within which builders operate contains sufficient information and data to help identify issues and take corrective action. 

Perhaps we are not looking at the right data in the right Way.

Time for a rethink.