Financial hurdles impacting dwelling approvals: Economist

Data released by the Australian Bureau of Statistics (ABS) revealed another drop in the total dwellings approved during February, falling by 1.9 per cent following a 2.5 per cent decline in January.

As highlighted by the Housing Industry Association’s (HIA) senior economist Tom Devitt, factors such as higher interest rates and funding costs for developers and builders have constrained the level of building approvals.

Speaking to Mortgage Business on the various challenges facing the building industry, Devitt explained further how these financial hurdles have impacted the country’s building approval rates.

“[Builder’s] financial difficulties early in the pandemic stemmed from the significant number of projects they took on before material and labour costs blew out, binding them to suddenly-less profitable projects with only limited scope to pass those costs on to the buyer (both the bank and the buyer prefer fixed price contracts as it provides them certainty, but often leaves the builder to deal with unforeseen cost increases or changing circumstances),” he said.

“The blowout in construction times (due to material and labour shortages) also delayed a lot of the progress payments that builders would normally receive, stretching their financial situation even thinner.”

Devitt further explained that low insolvencies, low interest rates, government support, and regulatory changes early on during the COVID-19 pandemic allowed builders to continue working in the industry “perhaps longer than they otherwise would have done”.

However, a lot of those builders ended up leaving the industry in more recent times, according to Devitt.

Devitt continued: “Over the last four years (since the pandemic began), construction insolvencies are pretty comparable to the four years before the pandemic, and seem to be moderating back towards more normal levels now (depending on how 2024 plays out).

“Volume builders in NSW and VIC appear to be struggling the most, with the most elevated land costs keeping potential buyers out of the market far more than other states.

“QLD, SA, and WA outlooks are brighter, with a combination of population growth (including residents leaving NSW and VIC), rental shortages and affordability advantages driving their recoveries.”

Commenting on the future outlook, Devitt explained that “the industry has mostly got through [the] pipeline of earlier less profitable projects”.

“The challenge now for builders is the lack of new work entering the pipeline as evidenced [by the approvals data],” Devitt said.

“Whether builders get through 2024 will depend on how much work they still have under construction to keep them busy, and how quickly they can attract new work.

“This will determine the trajectory of insolvencies in the industry.

“Builders who are able to specialise in the higher-end of the market, in custom/bespoke home builds, knockdown-rebuilds or larger renovations, also have a brighter outlook.

“There are potentially a lot of wealthier households and investors, with a lot of savings and assets accumulated during the pandemic, just waiting for a catalyst to re-enter the market later this year.”

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