As construction industry collapses have left thousands of Australians with half-finished homes, brokers are left tending to impacted borrowers.
The building sector has been in dire straits recently - with several large companies collapsing in the past year, leaving a swathe of of issues in their wake.
According to senior economist Adelaide Timbrell at ANZ Research, insolvency rates for the construction sector had risen “quickly” in the past year as the sector experienced headwinds from increasing material costs and weather events.
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She said the unstable increase in materials and weather conditions have caused a backlog in activity.
“When prices are changing really quickly, providing services at an agreed price can be a lot trickier than it was when inflation was very low,” she said.
The Reserve Bank has now tipped inflation is expected to hit 7 per cent by December, further fueling price increases in the industry.
Broker Amy Small at Small Local Brokers told The Adviser builders were beginning to pass on the additional cost in materials to borrowers.
“You can tell the builders are starting to get in trouble because they are increasing their invoices,” she said, noting that new invoices had been issued to almost “every client” in some cases up to $95,000.
“The builder has just asked the client to find that money halfway through the build because costs have blown out and the construction is trying to recoup those funds,” Ms Small said.
“A fixed build contract actually means nothing now.
“If anyone, anywhere in the world suddenly got an invoice for $70,000 they would maybe take a step back – that’s what we’re seeing from [families from] all walks of life.”
However, lenders have been sympathetic to the issues.
Regarding insolvencies Ms Small said it was in the banks’ best interests to help borrowers who have lost their building contracts due to insolvencies – as was the case for one of her clients.
Ms Small said the lender “stepped in” and provided “wonderful support” to help her client find a new builder.
“I believe it’s in the bank’s best interest to support clients that are in this sort of predicament as well,” Ms Small said, adding that lenders were liable to losses as well.
While this client was supported, she said there were a lot of delays and costs caused by the process.
Similarly, broker Karen Le Comte, principal broker at Smartline in Cleveland, Queensland, said she had a young couple hit with a variation over $30,000, putting immense pressure on their already stretched finances.
“Which has meant that we’ve had to start from the beginning, which means new documentation, new application, new valuation and reassessment,” Ms Le Comte said.
The lender, Commonwealth Bank, had been helpful to ensure the borrowers could increase their loan, but the new loan structure had changed increasing repayments to include principal and interest, she said.
“The Commonwealth Bank has accepted that increase and will allow us to base the new loan on the new valuation. So that’s put them in a stronger loan to value ratio than what they were originally when we submitted their loan,” Ms Le Comte said.
The new agreement has meant the drawn loan amount was refinanced to a principal and interest loan, rather than interest-only adding significant costs, Ms Le Comte said.
Despite some concerns from the added costs, it was far better than the alternative scenario.
“If it didn’t move forward with the increase in the build costs, you’re at a standstill and you have to sell an unfinished home,” she said.
“They’re not going to get anywhere near the value of what that property is worth because it’s not finished.
“I hope I don’t end up with anyone that’s in that boat.”
As brokers’ workloads are already stretched, the added processing will take a toll.
“To do one loan four times and have no added benefit to that – it’s a hell of an expense on us as brokers,” adding clawbacks were ”inevitable,” Ms Le Comte said.
“If you’ve got brokers out there that you know they’ve, they’ve written a tonne of construction loans, and they’re gonna start going through this and they will, that’s going to put a lot of pressure on businesses as well.”
Chief economist at the Housing Industry Australia, Tim Reardon, said it’s a challenging time for the industry and the worst is yet to come.
He said while the pandemic had brought a surge in demand for homes, building supplies had fallen following border closures, plus there was a skilled workforce shortage and a rise in the cost of materials.
“We’ve seen no increase in the population of Australia over the past few years and a significant increase in demand for homes as people move to lower density,” Mr Reardon said.
“We have almost doubled the volume of homes under construction than we do in a typical year.”
In addition, the time it takes to build has blown out from eight months to around 12 months, he said.
As supply struggles to meet demand for housing, Mr Reardon said the Reserve Bank’s plans to raise interest rates will play a part in slowing down demand.
“We can see that occurring already and other markets [where] rising rates are slowing demand for housing. And the same will transpire here,” he said.
But he does not expect that slowing down to occur until “the middle of 2023”.
“I don’t think that we’re at the worst of this yet,” Mr Reardon said.
“We’re expecting the material process to continue to rise over the course of the next 12 months, not as fast as they have in the previous years and ongoing strong demand for labour.”
But productivity is returning post-COVID.
“We’re seeing a return of productivity on site as COVID restrictions fall away and supply will improve over the course of this year as access to skilled labour from overseas becomes more readily available,” Mr Reardon said.
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