CONCERN: Kelvin Ryan says existing stock levels are a worry for homebuilders. Photos: Attila Csaszar

Builders adjust to market plunge

Wednesday, 25 May, 2016 - 16:32

The state’s residential building sector is in line for the biggest single-year decline in building activity in its history.

ADAPT or die, that’s the strong message coming from Western Australia’s top builders.

With the industry coming swiftly back to earth from record levels of activity, WA homebuilders are taking stock to adjust to the reality of a more conventional market.

The state government’s Housing Industry Forecasting Group’s recently released update on housing market conditions would have been no surprise to many builders in WA, but the rate at which the sector is retreating from all-time high activity levels is nonetheless resulting in an industry-wide adjustment.

The HIFG predicted there would be about 8,000 fewer housing starts in WA over the current financial year, down from the record of 31,194 houses started in 2014-15.

Forecasts for 2016-17 were also downgraded to 19,000 dwellings, after the HIFG previously flagged around 20,000 starts.

Land sales were also down, dropping 24 per cent on a year-on-year basis at the end of December, the HIFG said.

BGC Residential managing director Kelvin Ryan said the reduction was the biggest relative fall most in the industry had ever seen.

“In absolute terms we’ve had 16,000 or 17,000 starts before, but we’ve never seen it come off from 30,000,” Mr Ryan told Business News.

“It’s the relative drop that’s going to hurt.

“It’s like that old saying, ‘it’s not the drop that kills you, it’s when you hit the bottom’, but on this occasion I think it’s the opposite, it’s the drop – it’s substantial, it’s off 30 to 40 per cent.”

Mr Ryan said a reduction in demand from slowing population growth had been exacerbated by the large amounts of stock that had been rolled out over the past few years, some of which had not yet been sold.

“You can go out to a new estate that’s 12 months old and you can get a place for 20 to 30 grand cheaper than a new house and land package, and it’s already built and it’s ready to go,” he said.

“Until all of those are soaked up we won’t start to see any resurgence in new housing.”

JWH Group managing director Julian Walter said retrenchments had been a feature of the industry for some months, as builders prepared to ride out the slowing levels of activity.

“Confidence is the single biggest thing for us going forward,” Mr Walter told Business News.

“Job losses, and that sort of stuff, until that stabilises, particularly in the middle and upper markets, you’re just not going to get the punters to sign up, they’re just scared.

“All of us have suddenly had to go back and rethink our models on how we’ve been doing things.

“It’s the old story, when times are good, the fat creeps in.

“We’ve all gone back now and re-looked at processes and things like that.”

But Mr Walter said it was not just builders that needed to adjust to the new reality, with state and local governments also needing to play a role.

“The one struggling point for the industry is the amount of stuff we have to do to get a house built,” he said.

“It’s just ridiculous, the amount of red tape, that’s one I don’t know how we’re going to get around.”

QUICK FIX: Julian Walter says cutting red tape should be an industry priority. 

Mr Walter said red tape had resulted in long delays in processing building applications, increasing the time it took for a builder to mobilise the workforce required for a particular job.

“The hidden costs of that are holding costs, interest rates, and if you think there is a small chance of price increases, you have to factor that into your equation,” he said.

“If you’re taking six months to get to site, then your build time is running out to 12 months, then you’re really starting to talk about forward guessing of your prices and labour a year, or a year and a half out.

“That’s a pretty big ask.”

ABN Group managing director Dale Alcock said the slowing building activity in the state was providing good opportunity for home buyers, particularly those at the bottom end of the market.

“When you look at the opportunity to get competitive land and the cheapest interest rates you’re ever going to see and you don’t have a house to sell to get into the market, it’s absolutely primed for a first home owner to get in and build equity,” Mr Alcock said.

“The downside is relatively limited.”

But Mr Alcock said widespread incentives available for those willing to take the plunge into home ownership were some cause for concern.

Incentives available for home buyers included furnishings and appliances, or wall and floor coverings, while some builders and developers have been known to offer overseas holidays or cash rebates to get a sale across the line.

“We think that some of those moves are a little bit desperate,” Mr Alcock said.

“While there is competition, some of the so-called incentives that are out there are a bit of smoke and mirrors.

“If there are genuine discounts and incentives that’s fine, but some of these things have to be paid for by somebody and in a great deal of cases they are paid for by the consumer.

“I’d rather talk to my clients about the sort of home we’re going to build them and how it fits their needs and suits what they are about in terms of lifestyle and design, and also make sure it’s as affordable and competitive as we can.”

Overall, Mr Alcock said the homebuilding sector was a resilient one, and he had confidence the larger builders in particular would be able to ride out the changes in the industry.

“The critical thing is that we take stock of the fact that it is going to be a smaller pie and that we cut our cloth accordingly and make sure we can maintain profitability despite the market,” he said.

“It’s about being as proactive and positive as we can within that environment but being as realistic as we can on the cost side of the business.

“That work is under way, has been progressing by the market generally, most people are switched into that and are ensuring their businesses are the right size to tackle this environment.”

CAUTION: Dale Alcock has warned consumers that they generally pay for incentives.