What building company collapse ‘doomsday’ could trigger
It’s a worst-case scenario Victoria is looking to dodge — but this is what experts say would flow on from a major construction company collapse.
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The “doomsday” scenario of a major building company collapsing could hammer government coffers, but be good news for mortgage payers, industry insiders have revealed.
Fallout could include increased insurance premiums for new builds, a short-term rise in material and tradespeople costs, or even established property prices surging again.
But in the midterm, if people lost confidence in new builds, a leading economist argued a likely reduction in the cost of materials as demand weakened could improve the nation’s inflation figures, meaning fewer interest rate rises.
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The forecasts come after a week of speculation around the future of the nation’s biggest home builder, Metricon Homes.
The firm has rejected any suggestion it is in jeopardy, but with surging material costs leaving some builders faced with finishing homes without a profit due to fixed contracts set up to a year before — there are concerns around the wider building industry.
Kalus Kelly Intelex Lawyers partner for building and construction law Peter Lettieri said in most instances even if a builder did fold they would be replaced by another under mandatory domestic building insurance arrangements, and many of the same subcontractors who had been working on the home would return to finish the job — though with a “premium added to it”.
“That is usually around $300,000, so you can imagine those anywhere near the end of the job might be well covered,” Mr Lettieri said.
“But if you are only in the early stages, if the costs are greater than that, then you are going to be out of pocket potentially.”
But a widespread insurance payout would hit the state budget, with domestic building insurance underwritten by the state government-funded Victorian Managed Insurance Authority.
A building industry source said a major builder collapsing was a “doomsday” scenario with further ramifications to costs, as insurers would seek to have their builds completed as fast as possible to avoid negative publicity.
The source pointed to Queensland, where storms around Halloween in 2018 resulted in surging demand for roofers, which brought the cost per square metre of roofing from $8 to $20 in a matter of months.
Another industry source said the cost of building a home in Victoria had risen $40,000 in the past year, so anyone forced to renew a contract they had locked in a year or more ago would expect to pay at least that much more for their build.
Real Estate Institute of Victoria chief executive Quentin Kilian said a major builder’s collapse could impact rental costs and the cost of buying established houses as a hit to confidence in new builds would lead to fewer new homes.
“They (buyers and tenants) wouldn’t have a choice, if you hamper new supply then that doesn’t leave you with much choice other than to look at the established market,” Mr Kilian said.
Ray White chief economist Nerida Conisbee said one of the possible consequences of a loss of confidence in new builds would be less demand for them, which might allow material prices to recover and lower build costs — reducing the need for interest rate rises to reduce inflation.
“But there are a lot of moving parts,” Ms Conisbee said.
HIA chief economist Tim Reardon said those building a home should remain confident, with insolvencies in the industry 31 per cent below where they were in 2019.
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