Master Builders Victoria (MBV) fears soaring costs for materials, combined with labour shortages, will see more building and construction companies forced into insolvency.

The cost of building a home in Victoria is rising faster than in any other state because supply prices have hiked.

MBV CEO Rebecca Casson said one of the biggest challenges facing Victorian building and construction companies was escalating building product prices and supply shortages.

With building contract prices locked in, the large and unanticipated surge in the price of many building items such as timber and steel-based products meant that some builders were finding the cost of completing works more expensive than expected. In many cases, this can make projects loss-making.

Ms Casson warned that COVID-19 lockdowns in 2021 and labour shortages would further influence building and construction insolvencies in Victoria over the coming months.

“While the number of building and construction insolvencies are much lower than previous years, this partly reflects the fact that Victoria was in lockdown for many months this year, and companies using JobKeeper and other government grants may have been protected from certain types of financial stress,” she said.

“As Victoria re-opens, MBV is expecting building and construction insolvencies to rise following the withdrawal of State, and Commonwealth business supports coupled with the continued challenge of supply shortages and rising product prices.

“It appears that the large increases in builders’ material and labour costs following COVID-19 shutdowns, combined with the reduced workforce capacity, is starting to impact Victorian builders significantly. This could be a major issue for our industry moving forward.”

Ms Casson said changes in debt financing capabilities recently introduced by APRA would place added pressure on home builders’ due to a slowdown in economic activity. Mortgage applicants will now need to have the financial capacity to handle a 3 per cent increase in their interest rates.

“While this may relieve the burden of high debt to income levels across Australian households, it will also mean that the amount of money being spent in the housing market may decrease slightly moving forward,” Ms Casson said.

“Victorian building and construction businesses are continuing to feel the pinch from the materials and supply chain issue, highlighted by recent insolvencies. There are about 111,000 small building and construction businesses in Victoria. This issue is of significant concern.

“Our industry remains Victoria's largest full-time employer and contributes over 46 per cent of the state's tax revenue, with the housing sector alone generating $3 of economic activity for every $1 invested. When local government tax is included, the building and construction industry accounts for more than 57 per cent of the state’s tax revenue. 

“The latest ABS figures highlight that Victoria’s building and construction sector brushed off the effects of Melbourne’s sixth lockdown to lead the nation in construction activity for the first time, with more than $15 billion of work done between July and September 2021. Nevertheless, our sector still requires support to ensure it can steadfastly remain the cornerstone of our State’s post-COVID economic recovery.”

Leading economists say the performance of Victoria’s booming building and construction industry may have saved the national economy from a harder landing than expected in the September quarter.

Residential building has been one of the strongest parts of the economy and expanded by 11.4 per cent over the past year.

During the September 2021 quarter, non-residential construction was one of the best performers and grew by 3.9 per cent.

Ms Casson said MBV was actively involved in finding supply shortage solutions to ensure sustained growth for the building and construction industry. 

Additional information

Increase in prices for timber alone reported to be as much as 30 per cent this year. Steel product prices grew by more than 25 per cent in Victoria. The average cost of supplies used in home building rose 10.2 per cent in the year to September in Melbourne, compared to 5.9 per cent in Sydney and 8 per cent on average across Australian cities.

In September, 83 building and construction companies across Australia – including 19 in Victoria - entered external administration, up 31 per cent at the same time last year. The number of insolvencies is relatively low when considering the trend over the last seven years. This can be attributed to Federal and State Government support and low levels of tax enforcement from the ATO. However, MBV anticipates that insolvencies will rise again once Victoria exits the pandemic and returns to a form of normality earlier into 2022.