The building boom bust cycle

Investing in property is likely one of the biggest financial commitments you will ever make. And – like any other type of investment – while it’s not entirely without risk, that risk can and should be calculated and managed, so you can continue to successfully invest through the hard times with a confident outlook.

In light of the current issues impacting the Australian building industry, let’s take a look at what’s going on, why, and what you can do to protect yourself and your investments going forward.

Building booms and busts

Just like the property cycle, the Australian building industry has its good times and its bad.

Way back in October 2019, before anyone had even heard so much as a cough from Covid, the Reserve Bank of Australia (RBA) was signalling their concerns about the construction sector and the impact declining activity could have on economic growth.

This is because from 2012 through 2017 the sector had been experiencing massive growth, partly driven by government first homeowner grants. However, this boom was followed by a decline. Dwelling approvals fell by just over forty per cent between late 2017 and early 2020, with a corresponding decline in dwelling commencements when they dropped by just over thirty per cent between March 2018 and September 2019. Bringing us back to the concerns raised by the RBA, because at the very start of 2020, it appeared their predictions about the sector were about to be fulfilled.

Then came Covid, along with virtually unprecedented government support for the construction sector, reversing what looked to be a serious decline and – with the impetus of programs like HomeBuilder and grants for first homeowners and new homes – turning a downturn into an incredible boom for builders and home values alike.

Which leads us to the issues impacting the construction sector today

Despite the rise in interest rates and the end of HomeBuilder, the construction sector has struggled to keep pace with demand. Surging transport costs, supply chain challenges, increasing inflation, delays in approvals and titles, the rising cost of materials, labour shortages and increasing wages, have all led to delays and frustrations, with some builders unfortunately paying the ultimate price. Without turning this into a pity party for builders, let’s unpack some of the major issues so, as an investor, you can better understand the cluster of challenges facing the industry.

How does this impact property investors?

What all this means is that the combined crunch of issues outlined above are making themselves felt right now, and the price on the contract you signed twelve months ago may well mean that the builder literally cannot make a profit today. And while you do have a contract with the builder for a set price, the builder cannot be forced to start construction under that contract if they are set to lose money.

Some builders may be able to absorb this price gap themselves (albeit with very tight or non-existent profit margins), others may find themselves heading down the path of voluntary administration or liquidation, and some of these may be purchased by larger entities who will be able to honour existing contracts.

At the end of the day, as an investor, the price on that contract and the subsequent increase in costs, means that the value of your property has also likely increased. It literally costs more to build and buy today than it did twelve months ago.

Luke Harris

And that is why, for those investors and builders seemingly caught between a rock and a hard place, an alternative solution might well be to come to an agreement whereby the investor pays an additional cost as a variation, meaning the project can be delivered to the agreed standard – handing you a viable and valuable investment, and allowing the builder to quickly move onto other more profitable projects...using today’s values, not yesterday’s prices. A (relatively) small price to pay to create a win-win situation for all concerned parties, as opposed to a massive loss in time, money and opportunity for everyone.

As an investor, what can you do to protect yourself?

In good news for builders and investors going forward, cost escalations have now been incorporated into current project pricing. But there are still many things as investor you should be doing as a matter of course. Here’s our top ten.

Every boom has its bust, and every bust has its boom

While the tail end of the building boom seems likely to keep builders occupied for the remainder of this year and into 2023, it’s a waiting game to see what’s in store for the industry after that. In the event of a slowdown in activity, additional government incentives or proposed social housing construction projects may well come along to help fill the gap.

Either way, that’s why you should complete your due diligence, consider the risks…and ensure that you have the best protections and buffers in place to ride out any market shocks. After all, the hardest part of investing isn’t the buying, it’s the keeping and maintaining. Interest rates will go up and down, governments will change and other shocks, small and large, will come and go.

So, if you’re not sure what the market is doing, then now is the time to check in with your specialist team of property focused advisors – starting with your mentor. And if you don’t already have a property mentor, then book in a free discovery call to see if we can help you start making educated and planned progress today!

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