27/10/2021 - 15:35

House builders walking a tightrope

27/10/2021 - 15:35

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Builders are juggling surging demand for homes, shortages of workers and materials and their ability to deliver for buyers.

House builders walking a tightrope
Daniel Cooper says BGC now offers bricklayers salaries, instead of contracts, to attract them. Photo: David Henry

BGC Australia chief executive Daniel Cooper is understandably frustrated by the circumstances COVID-19 has created for the residential building sector. 

For many consumers, there has rarely been a better time to build – as millions of dollars in government stimulus is pumped into residential construction to drive homes starts. 

Most prospective homeowners also face rising equity, with CoreLogic’s September data showing an 18.1 per cent rise in Perth’s home values in the past 12 months. 

But for builders, a scarcity of tradespeople, escalating material costs and supply chain snags are making it increasingly difficult to complete projects anywhere near historic building timeframes. 

And while home build starts are near pre-pandemic highs, there is widespread uncertainty about where the industry will be in 12 months’ time. 

(click to view a PDF version of this special report)

Cracks have started to show with the recent collapse of builders Jaxon and Pindan and more companies could end up facing pressure on their margins.

Mr Cooper’s BGC Australia has topped Western Australia’s residential builders in the Housing Industry Association-Colorbond Steel Housing 100 Report for the second consecutive year, with 4,205 starts for 2020-21. 

Statewide, there were 23,985 starts in WA in the 12 months to July 2021, a 74 per cent increase on the previous financial year, and 50 per cent up from HIA’s forecasts 12 months ago.

If it were not for significant shortages of people on the ground to execute these developments, the numbers could be higher.

In September last year, the construction giant stopped taking on new builds to deal with the thousands of orders that flooded in during the earlier part of the year. 

“We have been very careful about how much work we took on, because we had to be able to have the resources to build them out,” Mr Cooper said. 

“We took sales from June to September (2020), then we closed the books.” 

The company’s recent axing of half of the 40 sales jobs it created last year to meet demand reflects the current climate. 

Sales slowdown

Closing the books has been a common move for many builders in the housing sector during the pandemic.

ABN Group managing director Dale Alcock said his company, which came in at second on HIA’s list with 3,150 starts for 2020-21, limited sales during the stimulus period. 

This was to ensure the group could deliver grant eligibility for its clients, albeit with increased construction timeframes. 

He could not put a figure on how long projects were running out by, but there were reports of residential builds taking at least four months more than they did before the pandemic. 

“At the ABN Group, we are not immune to the demands this increase in activity places on us, however, we have been here before and we understand what is required to deliver the best outcome,” he said. 

“Sure, you may have to wait longer for completion, but we are building a quality home and we will be there from the start to completion and beyond.”

JWH Group general manager Jay Walter said his family owned company took a similar approach, capping sales from August last year. 

“We slowed (our sales) right down,” he said. 

“That was really just us trying to control the flow, because if you wanted you could just leave your doors open and the sales would have kept rolling through. 

“We wanted to responsibly build and … make sure we could try and maintain our levels of staffing and our trade base.” 

Mr Walter said the industry could not maintain peak levels indefinitely. 

“There’s no point tripling or quadrupling the size of the business, if you know that you’re just going to have to come down again,” he said. 

“We tried to take an approach of let’s just process what we can and feed that through the business.” 

JWH Group, which heads up a conglomeration of building companies over 12 locations in WA, came in as the state’s fifth largest residential builder with 1,279 home building starts in 2020-21. 

Activity surge 

For JWH, this represented a more than doubling of its home build starts, up from 630 in 2019-20. 

This trajectory aligned with most of the state’s major builders, with BGC and ABN registering an 80 per cent and 105 per cent uptick in home build starts since the previous financial year respectively. 

Builders attributed this surge to significant government stimulus, introduced in response to industry concerns at the start of the pandemic  

About $500 million has been allocated to more than 25,000 applicants under the state’s $20,000 building bonus. 

Federally, the government has paid $185 million in HomeBuilder grants to WA residents, with that figure expected to rise as more applications are processed. 

These measures have led to an 89.1 per cent boost in building approvals in WA for 2020-21, the strongest growth on record for any jurisdiction.

Scott Park Group grew from 741 starts in 2019-20 to 1,803 in 2020-21, positioning it at fourth on the residential builders list. 

Managing director Scott Park said his company had been well-positioned to capitalise on the growth that came via government stimulus and he did not have to slow sales during the pandemic. 

“We are selling as per normal (and) we know this is going to come to an end,” he said. 

“Demand is still strong and even outside of the stimulus package we are getting strong sales.” 

Mr Park’s approach is to take on all the work he can during the current boom as he knows it will stabilise in time. 

He said cost increases were affecting each part of the home building supply chain and the company had to factor in price increases into its contracts. 

Low base

WA housing starts are still not at the levels they were before the latest downturn.

Between 2015 and 2020, the industry experienced its lowest levels of activity for decades. 

In 2014-15, WA’s top two residential builders, ABN Group and BGC, recorded 3,709 and 4,834 home starts respectively. 

By 2018-19, these numbers dropped to 1,703 and 1,624. 

Mr Cooper said while the government stimulus had bumped demand to unmanageable levels, residential builders needed a lifeline at the time. 

“We were at the lowest number of house starts since 1983 at the start of 2020 and in the middle of a pandemic, so the future was not looking very bright,” he said. 

“It was good for people and industry to have that stimulus at a time when we weren’t sure where the industry was going, but it created a wave of demand which has led to supply side challenges, in a COVID restricted market.” 

He said while the industry had started to show green shoots, there had been false starts in the past. 

“We have underbuilt in WA for a long time, so we had a pent-up demand and once that bonus was available, they came out,” he said. 

In line with that, BGC restructured its business to shift away from high-end building to a lean model focusing on first homebuyer and second home trade-ups, Mr Cooper said. 

Worker shortages

Skills shortages have hit WA’s construction industry hard since the start of the pandemic, leading to considerable delays and cost pressures for housing projects. 

A Master Builders Association of WA report earlier this year stated that the longest delays were being reported for bricklayers, carpenters and structural steel workers. 

The Chamber of Commerce and Industry of WA’s June quarter business confidence report identified access to skilled workers as the key barrier to growth, affecting 79 per cent of WA construction businesses. 

In construction, 72 per cent of businesses said they were struggling to fill at least one position. 

Mr Cooper said the industry’s lack of ability to bring in overseas workers was leading to widespread frustration among builders. 

“Normally, you would just keep bringing in skilled labour or trades from interstate or overseas – we just don’t have that ability,” he said.

“We’ve worked very hard with state and federal government to try and bring people from overseas, but up to this point we haven’t been successful – it’s our major challenge. 

“In terms of labour, we are fishing from the same puddle, we’re not fishing from the same pool.”  

He said this meant builders had to lift their game to attract talent. 

BGC has taken the unprecedented step of offering bricklayers salaries, departing from the traditional subcontractor model. 

Talent pipeline

The building giant is also stepping up its apprentice program, opening more than 40 places within the group and its trading partners. 

ABN’s Dale Alcock has always put a lot of emphasis on hiring apprentices. In the past 12 months he has amplified that even further. 

“We are now employing more than double the number of young West Australians than we were 18 months ago,” he said.  

The state and federal governments have incentives for businesses to take on apprenticeships, including wage subsidies and payroll tax exemptions. 

The Construction Training Fund has encouraged builders to invest in training during the pandemic. 

Master Builders Association of WA director of housing and construction Jason Robertson said the organisation was continually working with government to ensure training pathways for construction.

Future forecasts

HIA WA estimated that total housing starts in WA were expected to reach 22,279 in 2021-22, a 7 per cent dip from the recent financial year but significantly higher than the 10,590 they reached in 2019-20. 

HIA WA executive director Cath Hart said interstate migration also played a role in the surge in building approvals, with 1,205 people moving to WA from interstate in the final quarter of 2020 – the highest level since 2013. 

“WA’s reputation as a ‘COVID-safe state’ has enticed more people to live and build here, which is a significant turnaround because pre-COVID more people were leaving WA for the east coast,” Ms Hart said. 

Mr Cooper said once WA opened its international borders, it could lift demand for residential housing while boosting labour supply. 

“We’ll be able to get the trade, so we will be able to build more (and) it’ll actually drive an increase in housing starts as well, because migration is a huge driver of household formation. 

“The thing that’s driving the housing market at the moment is that there are all-time record lows of existing homes on the market (and) you’ve got rental vacancy rates at sub one per cent.” 

Cost blowouts 

Escalating labour and material prices have caused construction project costs in WA to blow out by up to 20 per cent, industry sources have said.  

The price of bricks has doubled since the start of the pandemic and competition has led to tradespeople being paid at a premium. 

Timber shortages have sent prices skyrocketing, with Bunnings’ parent company, Wesfarmers, reporting a 20 per cent increase in local lumber prices in July. 

BGC’s Mr Cooper said shipping delays and high demand for materials in other parts of the world was having a ripple effect in WA. 

“There are challenges all through the supply chain, which are accentuated by the fact that you’ve got closed borders,” he said. 

“That’s made it difficult for all sorts of materials. We’ve got global shipping problems, problems with ports, access issues, union issues. 

“We have had issues with timber, because as the world emerges from COVID, it starts to open up again, then the demand is really high – we’ve seen that with all sorts of materials and commodities.” 

Insolvencies 

Price spikes and difficulties obtaining labour have not only led to project delays but have forced some out of the game altogether. 

The recent collapses of Pindan and Jaxon, after the builders racked up a combined $90 million in debt, showed how builders can fall victim to supply squeezes. 

For BGC, spreading risk is key to sheltering against such conditions. 

“A lot of that is the fact that jobs were priced some time ago (then) … you continue to build in a loss-making exercise,” Mr Cooper said. 

“You need to have a balance of profitable work to go with that unprofitable work.”

Mr Cooper said once builders were aware of cost increases, they could manage their risk by factoring in impending rises.

Mr Alcock said builders needed to ensure they had appropriate levels of cover such as home warranty insurance for every contract they took on. 

“We have also ensured that we have correctly priced and provisioned the price of our homes to ensure that we can pay the escalated trade and material supply rates,” he said. 

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