Labor’s first federal budget since taking power promised a big nationwide scheme to build 1 million new homes.

Such grand announcements are easy to make at budget time, because like everything to do with housing, it’s up to the individual states and territories to actually make the federal government’s promises come true.

And within all of these states, building companies are struggling to survive. Inflation, shortage of labour, supply chain issues and other challenges are making it hard to get construction projects completed at the rate needed to put any kind of dent in the supply shortfall.

More projects, more stress

In March this year, there were a record high 240k dwellings under construction across Australia. But things aren’t exactly peachy for builders as financial stress is crippling much of the industry.

We’d heard about the pressures on builders before, but it never really hit home until Metricon, Australia’s biggest and many would say most reliable construction company, was revealed to be on the brink of collapse. Some conversations with government followed and the construction giant is still kicking on at this stage.

But not all builders get the same attention or are considered important enough to be bailed out if needed. This is why we have seen news reports of builders going belly up one after the other this year. Some people in the insolvency industry are calling it a crisis. Indeed, Insolvency Australia numbers show that construction insolvencies are exceeding pre-Covid levels and now make up 30% of insolvencies for all Australian businesses.

And it’s getting worse

Now that interest rates have been rising, builders are finding it even harder to stay afloat as their debts become much more expensive to service.

More than a quarter of Australia’s biggest 200 building firms lost money in the year to March ‘22 up from 15% the year earlier. And that was before rates went up and prices began coming down. Many builders had cash stashed thanks to government stimulus during Covid, but they will be running out of that much faster than they were 6 months ago.

So who will build Labor’s 1 million homes?

The government plans to invest plenty of capital in the plan, but the capacity of builders to deliver the projects in any kind of short term timeframe must be questioned.

Then, there is the additional layer of government to consider. At a granular level, it is the councils within each state that need to facilitate the construction. And if you look at the nation’s shortage of housing in recent years, they don’t have a great record of getting it done. Looking at Sydney for example, just 1 council out of 35 is on track to meet its new housing supply targets for 2026. Adding thousands more homes to the existing targets really just means adding more development applications to the backlogs to be considered and approved at council meetings.

What does this mean for investors?

Construction challenges got b Invested founder Nathan Birch thinking…if he could purchase properties for less money than it would cost to build them from scratch, their value would be solid. As prices have fallen in most capitals in recent months, there are more opportunities to make such purchases. And while it is always a great time to invest, now is particularly sweet if you can come up with the finance.

Prices are coming off and rents are soaring. There is still a lack of supply being constructed, even as the government prepares to lift migration caps and bring many more new tenants into the country. Making a great deal now means your long term value and income potential are both in good shape.

If you want more information or need help mapping out an investment strategy, reach out to B.Invested.

References:

1m house plan in budget

Construction firms running at loss