Builders incentivised to meet market
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Challenging conditions loom for homebuilders in WA, as demand for new housing slows after record-breaking peaks of activity last year.
Also this week, how alternative construction techniques are not yet threatening double brick's dominance.
WA’s builders are in for a challenging few years, with housing starts expected to come off quickly from the record high of more than 31,000 homes started in 2014-15.
The Housing Industry Association has predicted just over 25,000 starts in 2015-16, before slipping back to around 21,000 starts in 2016-17.
The state government’s Housing Industry Forecasting Group is not as optimistic for the current financial year, flagging 23,000 starts in 2015-16, before falling back to 20,000 starts in 2016-17.
Master Builders Association WA executive director Michael McLean said while the market was returning to normal from some extraordinary highs, going from 31,000 starts to 23,000 starts would be a pretty big dip.
“That means that some of the people involved in producing 31,000 units aren’t going to have a job in the next 12 months, and we’re already seeing builders respond to that reduced demand at the moment,” Mr McLean told Business News.
“In terms of trade job ads, there’s been a 28 per cent fall November to November. Most of those would be in bricklayers, which is a lead indicator.
“Builders are still active and busy completing projects that have commenced in the last 12 months, but this time next year you’re not going to have as much activity in the field, so that’s when the pain will start to be felt.”
HIA regional executive director John Gelavis said he expected builders to adjust their strategies to account for the drop in activity, which he also described as a more normal market. However, there remained good opportunity for buyers in current conditions.
“Interest rates are at very low levels, but with the increasing competition and the mechanisms that are in place for first homebuyers, like the $10,000 grant for new builds and stamp duty exemptions, there are still lots of incentives, so that presents an opportunity,” Mr Gelavis said.
Competitive players
With a backdrop of decreased activity, and buyers also being lured to an established market where prices are falling, it is clear builders are going to be competing strongly to maintain their levels of activity as the market shrinks.
That competition is resulting in a number of different strategies, but one thing seems consistent – the consumer is winning.
While the price of building is expected to remain steady, builders are offering comprehensive incentive packages in the form of design features, appliances and high-end finishes to get sales across the line.
“Land developers are out there with the giveaways too,” BGC Residential managing director Kelvin Ryan said.
“You really know when this market is challenging because it’s not just the builders; it’s the land developers providing incentives as well.”
Mr Ryan said both traffic and sales leads were significantly down at the builder’s display villages, a symptom of reduced population growth in WA.
“It also doesn’t help when you can go into a 12-month-old estate and buy an existing house at or sometimes below what a new home package is,” he said
Mr Ryan said changes to Australia’s banking system were also likely to have a marked effect on demand from investors for new housing product.
The most critical of those changes, Mr Ryan said, was the requirement for banks to set aside increased capital to offset their loan books under new Australian Prudential Regulation Authority rules, which will likely result in less lending for property investment.
“Lending is becoming the major influencer of the housing market going forward, particularly in the investment sector,” Mr Ryan told Business News.
“Investors have been a big driver in the past two or three years in residential housing.
“What’s happening, particularly in the investment space, it’s getting tougher and tougher for investors to get over the line in projects.”
Mr Ryan said BGC, which is the nation’s largest homebuilder with all of its activity in WA, would be working extremely hard to maintain its level of building rather than simply maintaining market share.
“Our model is a vertically integrated model where we put product through,” he said.
“Most people are happy to play a market share game but we want to play an absolute quantum game.
“We’ve got market share of X, but our brick plant makes Y bricks, so we need to sell Y homes.”
The state’s second-biggest builder, ABN Group, has sought to insulate itself from the ebbs and flows of the WA market by shifting its operations to other states.
ABN Group managing director Dale Alcock said WA had always been the most competitive marketplace for residential construction in Australia, a reality that led to the builder seeking out other markets.
“Some weatherproofing that we’ve provided ourselves is that we completed just over 1,000 homes in Melbourne last financial year,” Mr Alcock said.
“The Melbourne market is at a different point in the cycle; the Melbourne economy is not so much boom and bust, so we see a very positive contribution to our group’s bottom line is being generated out of a different market interstate.
“Again, that helps in periods where not all markets are firing at the same time and at different periods of the cycle.”
Summit Homes Group has been preparing for the increased competition for most of this year to ensure its order book doesn’t slip.
Summit new homes general manager Tony Harvie said the company was gearing up to roll out 22 new display homes in the first three months of next year, to demonstrate the builder’s capabilities.
“We could see a changing market coming a while away, so we’ve decided to go in hard,” Mr Harvie told Business News.
“We’re going to be very aggressive in that space and will be offering people choice
“There is still going to be people building houses, but you certainly can’t be asleep at the wheel, you’re going to have to offer choice and listen to what your customers want.”
But Mr Harvie said a slower market than the peaks of the last year also provided advantages for builders.
“When the market is booming and going at a very fast pace, you can lose a bit of control,” he said.
“When the market is a little slower, it does suit a builder like us because we can offer choice.
“There will be pricing pressures, we’re aware of that, but that’s just about making sure we make good business decisions.”
JWH Group managing director Julian Walter actually welcomed the decreased activity, saying it would take a significant amount of pressure out of the market.
“There’s been a few builders fall over, but we’re getting back in balance,” Mr Walter said.
“We were tight for trades and we were tight for staff, so it’s probably a much more comfortable situation.
“It’s easier to get staff, it’s easier to get trades and it’s easier to get materials.
“We had a situation where the brick companies were struggling to keep up and you don’t want that because brick companies aren’t going to go increasing capacity because it’s far too expensive.”
Melbourne-based and ASX-listed builder Simonds Group has signalled confidence in WA homebuilding, announcing a countercyclical offer to buy Gemmill Homes for $6 million last month.
However, that $6 million acquisition price, which remains subject to a call option exercisable until July next year, suggests margins could be tight at Gemmill, which built 591 houses in 2014-15 and brought in revenue of $132 million.
Nevertheless, the arrival of Simonds Group to the market will act as yet another catalyst for competition, with its status as the nation’s sixth-largest builder, at 2,726 starts in 2014-15, providing significant market clout.
Insurance issues
Battling to lure buyers as the market returns to normal is not the only challenge facing WA builders, with the state’s housing indemnity insurance scheme remaining a significant impost for homebuyers.
Housing indemnity insurance is required on all building jobs worth more than $20,000 in WA and acts as a last resort to protect homebuyers in the case of a builder’s collapse.
After three builders failed in 2015, however, the only major provider in the indemnity insurance market, QBE Insurance Group, flagged an 18 per cent increase in premiums to take effect from January 1.
QBE’s price hike means buyers will have to spend between $3,500 and $5,000 on indemnity insurance for a typical house from January 1.
The largest builder to fail was Capital Works Constructions, which was the state’s 14th-largest homebuilder before its collapse in May. Despite being a relatively new company, Capital Works Constructions traded under the names Freelife Homes and Visionaire, had 229 homes under construction and a further 84 in its pipeline.
Its collapse triggered a litany of indemnity insurance claims and raised questions about the process by which QBE approved its levels of work.
While Mr Alcock said he wasn’t aware of any more builders in dire straits at the moment, he warned potential homebuyers to research their builder carefully before committing to construct a house.
He said he believed it would be highly unlikely to come through the next phase of the building cycle without more collapses occurring.
“Customers need to make an informed decision on who they choose to build with, based on performance, longevity and track record,” Mr Alcock said.
“Housing indemnity plays a role, but that shouldn’t be the bottom line insurance that people rely upon for their decision making, you’d hope consumers would be a little bit more informed.”
He said while the insurance was necessary, it had the effect of lulling consumers into a false sense of security, thinking they had a safety net.
But beyond that, Mr Alcock said the situation with QBE being the only provider had resulted in an uncompetitive and inequitable market.
“I’ve always thought that, from our position of strength financially and how we go about operating, we should have a far lower premium than someone else who could be at a far higher risk,” he said.
“That lack of competition in the market and the lack of ability to attract new players into the market is a problem.”
Mr Walter shared Mr Alcock’s view, saying it was “annoying” that major players with a solid track record and no issues were subject to the same indemnity insurance costs as new entrants to the market.
“There’s a fair bit of grumbling in the industry about some of the smaller players that have been allowed to get insurance at levels that are just ridiculous,” Mr Walter said.
“It’s not a free market in that way; if someone is a higher risk they should be paying a higher premium.”
He said there needed to be more incentive for insurers to enter the market, which would result in a more robust regulatory environment.
But if the situation were to remain in status quo, closer checks were needed rather than simply examining a builder’s financials before determining how many houses they could commence.
“I keep saying to these insurers that they should be working hand-in-glove with the major suppliers, because they have pretty solid credit departments and they don’t want to see builders going under because it affects what they get paid,” Mr Walter said.
“If the insurers spent a bit of time talking to the major suppliers they would get some good background on who is a little bit weak and rein-in the amount of sales they can do until they can show adequacy.”
Changing dynamics
One of the biggest changes in recent years in the homebuilding sector has been housing design, partly brought on by land developers producing smaller and smaller lots.
Mr Walter said the other significant factor in design change was a lifestyle shift to smaller houses.
“Whereas before everyone was asking for a four-bedroom two-bathroom McMansion with TV room, games room and all that crap, people now want a sensible house with one main, larger living area,” Mr Walter said.
“It’s just getting a more logical house. People are seeing that it will cost another $25,000 for a room they will barely use, they’re looking at the mortgage rate and all that and they’re saying ‘that’s rubbish we don’t need that’.”
Summit’s Mr Harvie said consumers were increasingly looking for choice and customisation in new homes, and that did not necessarily mean bigger houses.
“People are looking for really nice kitchens, master suites with ensuites and really nice looking elevations,” Mr Harvie said.
“The customers don’t want to get a small block and then have to build a basic looking home. They’re happy with the smaller home provided it’s got some good features in it.”
The smaller housing phenomenon is set to continue, with LWP Property Group establishing itself as one of the first movers on so-called micro-lots in Perth, working closely with a panel of builders to create housing solutions on blocks as small as 80 square metres in Ellenbrook.
But that’s not as small as what’s been flagged, with discussions continuing at a regulatory level on allowing developers to roll out lots as small as 45sqm.
Mr Gelavis said micro-lots were about meeting a need – providing opportunities for first homebuyers to get on to the property ladder at an affordable price.
But BGC’s Mr Ryan questioned whether the micro-lots would be popular, and warned they may skew traditional measures of market activity.
“We measure activity in this industry by building starts, but when you start a 45sqm micro-house, it’s a bit different from a 120sqm house,” Mr Ryan said.
“It’s certainly going to impact on the quasi-measure of a start so we’re going to have to recalibrate if we start building too many of these micro-lots.
“Eventually people will trade space for place, and in my opinion, if you’re going to live in a 45sqm single-storey house in an outer suburb, you may as well start thinking about an apartment.
“If you’re looking at an apartment-style in an outer suburb, why wouldn’t you go into an inner suburb and have the amenity?”