Home building costs soar as builders raise prices to protect themselves

The collapse came days after another Victorian builder, Snowdon Developments, went into voluntary administration leaving 550 homes unfinished.

On Friday another major private developer, CBD Developments, blamed government lease relief measures and the COVID-19 pandemic for the collapse of six of its companies.

Credit reporting agency Creditor Watch expects more bad news to come in the building sector.

“We’ve seen the bankruptcy numbers start to creep up,” said chief executive Patrick Coghlan, though he noted the bankruptcy numbers were still below 2019 levels.

After the COVID-inspired lull, Australian banks and the Tax Office have begun issuing final notices to struggling businesses, something that hasn’t been done since the pandemic hit.

Many construction companies have a hard time paying their bills on time – a sure sign of trouble ahead. Creditor Watch data shows nearly 12 percent of construction companies are late paying bills 60 days.

Coghlan says builders small and large are now vulnerable. “They operate with very thin margins. When something goes wrong, whether it’s a big project or a small project, it costs a lot of money. Suddenly, you have an unprofitable project.”

Architect Sean Godsell, who in May won the Australian Institute of Architects Gold Medal.Credit:Josh Robenstone

One of Victoria’s most influential architects, Sean Godsell, said rising housing construction costs were becoming an acute problem, “rising so rapidly that it renders basic building projects intangible for a large part of society”.

Godsell said the unintended consequence of fixed-price contracts and the current rate of inflation meant builders could put a larger margin into fixed-price purely to protect themselves.

“If a builder is forced to commit to a fixed price with an unpredictable market that increases every month, the builder logically thinks ‘Well, I’m not going bankrupt because of this project’.”

Urban designer Andy Fergus said finding a builder to do major renovation work was proving difficult for clients, with one job recently proving particularly difficult.

“I probably talked to 15 builders in the area who were like, ‘oh, we usually do renovations, but we’re not just doing new builds at the moment, and we’re just doing projects over a million dollars’.”

While the demand for builders is unprecedented, Fergus says many are quick to blame them when things go wrong. “Builders are very exposed financially,” he said.

He said demand for builders was high as domestic construction had been boosted by the Morrison government’s HomeBuilder 2020 grant, and now also competed with many other major projects in the state, including the construction of social housing and major transportation infrastructure.

Jamie Sormann of Foomann Architects also leads ArchiTeam, a cooperative that supports small practices.

Sormann said consideration should be given to updating builders’ capabilities to allow for multiple price increases and decreases that exclude profit margins, to prevent builder losses while still protecting consumers.

He points to the various market forces that have driven up construction prices since the pandemic began, among them the federal government’s $25,000 HomeBuilder grant in 2020.

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“This ultimately benefits mass housing developers. Some of my clients do it right away and they save $25,000 – but they’re all building anyway.”

He said the current state of the market meant those considering major renovations or new developments should start the design and planning process as soon as possible.

“This is a good time to start taking the project through the early planning stages, with the hope that, in the one year or even two years it will take to fully design the project and finish it through urban planning, we will be in a more established position. .”

For builder Mark Menegatti, skilled trades and labor are hard to find. “I don’t know where everyone has disappeared to. There is a huge shortage of people in Victoria.”

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