Home building costs in Australia have skyrocketed in recent years, posing substantial challenges for homeowners, builders, and suppliers. From material shortages to prolonged completion times, the industry is grappling with issues that affect budgets and timelines.
Adding to the pressure, Australian governments have pledged to build 1.2 million homes by mid-2029, under the National Housing Accord — a bold target amidst rising costs and supply chain constraints.
Find out what’s fuelling the cost increases and how stakeholders can safeguard their interests.
First, let’s dispel some common misconceptions about rising costs:
- It’s only due to inflation
- Builders are overcharging
- New builds are only affected
- Local factors are to blame
- Actually, no, it’s just tighter government regulations
- DIY is a cheaper alternative
- The crisis will go away soon, and
- Housing demand is the only driver.
In reality, several factors come into play. We unpack the main ones below.
The Demand Surge Is Pushing Prices Higher
A key driver of higher costs is the surge in demand for residential construction. Low interest rates and government incentives, such as the HomeBuilder program, spurred a boom in building approvals in 2020-2021. This influx of projects caused a bottleneck, and builders struggled to cope with the workload.
For instance, in the five years to 2023, the cost of constructing a new mid-rise apartment in Sydney rose by 36% ($239,000) to $905,000. That’s more than the estimated sale price of $885,000. The maths doesn’t add up.
If you’re planning a new build or renovation, keep in mind that demand may still exceed supply in certain regions. This trend is compounded by Australia’s worsening housing crisis.
On top of this, Australia has committed to approximately $100 billion in major infrastructure projects since mid-2021. The largest ones span the eastern states as well as Tasmania, Western Australia and South Australia.
Material and Labour Shortages Are Still a Problem
During the pandemic, global supply chain disruptions resulted in widespread material shortages. They’re still a problem in the construction industry. Escalating labour shortages have compounded the issue, with skilled workers in short supply and demand for tradies at an all-time high. According to Jobs and Skills Australia, all construction trades occupations are in the national shortage list.
These factors have inched up the cost of building materials and wages. Hence, builders and homeowners must factor in potential cost hikes in their budgets.
Why Fixed-Price Contracts Are Risky
In the current climate, fixed-price contracts benefit no one. Historically, such contracts have been popular with both builders and homeowners. However, the reality of rising costs and protracted project timelines means these arrangements are a financial risk for construction companies.
Many have struggled to absorb cost increases, leading to reduced profit margins and, in some cases, insolvencies. Last October, more than 1,300 construction businesses went under.
If you’re a would-be homeowner, consider negotiating flexible contract terms with your builder.
Stakeholders Under Strain
The impacts of rising home building costs extend to every corner of the industry.
Homeowners face the risk of unfinished projects or unexpected expenses if their builder becomes insolvent. Meanwhile, suppliers often face with unpaid invoices, while construction companies battle cashflow woes and delayed timelines.
Ensure you assess the credit ratings and insurance coverage of those with whom you do business, whether you’re a consumer, supplier or builder.
Insurance as a Safeguard
Rising building costs present unique challenges and brokers and advisers play a crucial role in managing related financial risks through tailored insurance solutions.
For example:
Home Warranty Insurance protects homeowners against incomplete builds or defects caused by builder insolvency, offering vital financial security.
Construction Insurance safeguards builders, covering risks such as:
- Material damage
- Liability exposure.
Trade Credit Insurance helps suppliers mitigate the risk of non-payment, ensuring stability in the supply chain.
As your broker or adviser, we’re here to guide you through insurance options tailored to your specific needs, ensuring comprehensive protection and peace of mind.