‘Do your homework’: SA government warns investors

People investing in construction projects need to do their “homework” and be aware of the risks the current uncertainty in the construction industry can pose, according to the South Australian government.

With an increasing trend of builders falling into external administrations, the South Australian government has created a new campaign “warning people undertaking new home builds and renovations to do their homework before signing the dotted line”.

The state government has said the campaign will use targeted social media posts to support easy-to-understand information about how borrowers can protect themselves from risk, including by flagging the importance of having appropriate building indemnity insurance (BII).

It comes as three South Australian builders entered administration in recent months: Felmeri Builders & Developers Pty Ltd trading as Felmeri Homes; 7 Star Construction Pty Ltd; and Qattro Built Pty Ltd.

Launching the campaign last week, the South Australian Minister for Small and Family Business Andrea Michaels stated: “Building a home is a major investment and it’s been heartbreaking to see stories of people left in the lurch recently.

“People who should’ve been celebrating building their dream home, have instead been left in nightmare scenarios and that’s why we have launched this campaign.

“We want to make sure South Australians know their rights and the steps they can take to protect themselves before they embark on building a home.”

The state government’s campaign comes after the most recent Business Risk Index from credit reporting agency CreditorWatch found that “external administrations in the construction industry have been consistently trending upward since May 2021 and are now above pre-COVID-19 levels”.

CreditorWatch chief economist Anneke Thompson stated that while the monetary policy tightening had worked, businesses were going to suffer.

She commented: “The unfortunate reality is that this will also result in business failures, particularly for those businesses that were already only marginally profitable when interest rates were low.”

The chief executive of CreditorWatch, Patrick Coghlan, added that the rise in administrations was only the beginning, warning: “We’re far from the peak of business failures.”

Given the uncertainty in the construction industry at the moment, the volume and number of people taking on new construction projects have fallen.

According to data from the Australian Bureau of Statistics (ABS), the value of new loan commitments for the construction of new dwellings had dropped to $1.48 billion in July, down 35.3 per cent compared to July 2022.

Moreover, the number of new loan commitments for the construction of new dwellings dropped 42.1 per cent over the year, to 2,398 loans.

Values have been falling steadily for construction loans since hitting a peak in February 2021, when new construction loans reached $4.19 billion.

Speaking to Mortgage Business sister brand The Adviser, finance broker and Perry Finance director Cameron Perry said the statistics reflected the struggle many construction firms have been facing with rising costs since the pandemic.

Mr Perry stated: “[It’s] a difficult market for property developers, starting obviously with COVID-19 and the supply chain issues. The building industry probably did better than most during lockdowns, as it was one of the industries that was able to carry on for most of that period.

“There were a lot of builders that went into fixed price contracts where costs were fairly stable over a number of years, but suddenly they’ve gone up 40–50 per cent, and they couldn’t handle the extra costs.

“A lot of the major builders have gone under, so buyers are a little bit more hesitant to buy off the plan because they don’t have that confidence the building is going to be built in a timely manner or even at all.”

The drop in building activity comes amid a growing housing supply shortage. The federal government is now moving to establish a Housing Australia Future Fund (HAFF) in order to build 30,000 new homes in the first five years and a further 4,000 homes for women and children.

State governments have also bolstered their housing development commitments as NSW released a $2.8 billion package as part of its recent budget to provide greater access to affordable housing and Victoria set a target to build 80,000 homes a year for 10 years.

[Related: Immigration needs to be lower to improve affordability: Shane Oliver]