Protection for consumer deposits in Australia's construction sector is vital as insolvencies rise, threatening the stability of the homebuilding industry.
If there is an industry in Australia that needs confidence right now, it's the residential construction sector. Yet, at a time of unprecedented need to build, construction companies are collapsing like houses of cards, leaving consumers with lost deposits and half-finished homes.
For consumers, embarking on building or renovating a home represents a large financial commitment.
However, when compared to other major investments that Australians will make in their lifetime, protection for their funds is limited.
Indeed, builders can - and do - spend consumer deposits in any way that they please.
Something's broken in the residential construction sector
Australia needs to build new homes. Driving demand is both high immigration, with 2023 seeing net migration of 518,000 immigrants, coupled with an ongoing trend for fewer habitants per home.
On the supply side, building commencements are in decline, with 2024 data for new dwelling commencements at 10-year lows. Overall, the ratio of new population to new dwelling approval is the worst since data began to be recorded in 1984.
Despite this urgent need to build, residential construction companies are going into liquidation at an alarming rate. According to ASIC data, in the 2023-2024 financial year, 2832 construction companies went into insolvency in Australia, representing the greatest proportion of company collapses and a problem that is trending worse, not better. These are not small or newly established companies, either.
Several industry-revered names have gone under, including Clough Group, Probuild, and Porter Davis Homes.
COVID disruptions, including skilled labour shortages and rising raw material costs, are often blamed for the high level of insolvencies. As the economy begins to settle down, the building industry doesn't appear to be following suit.
Warning signs have been unheeded, with a 2022 review by the Reserve Bank of Australia identifying financial pressures across the sector. This same report predicted that insolvency levels would increase - exactly what has transpired since - and potential for financial stress of these insolvencies to spread to consumers and the wider construction supply chain.
Going 'under the hood,' Australia's homebuilding industry is characterised by low-profit margins and fixed-price contracts, meaning that there is little headroom or mechanism for builders to absorb pressures such as rises in material costs and labour shortages.
This means that many homebuilders have been operating at negative cashflows, where suppliers don't get paid, and projects are left unfinished.
