A lot of builders are only just holding on right now because of social housing investment, but successive governments have retreated from social housing, writes Andrea Sharam.
This final article in our series on overcoming housing construction constraints, we reflect on the prospect for reform.
The most significant finding of AHURI’s Overcoming construction constraints for the supply of new detached and high-rise housing was that market volatility constrains output, and without addressing volatility of demand, other measures to lift output will be ineffectual.
Builders operate in a highly competitive but volatile environment. Yet their service is based on contracted prices. The result is very low margins and high cash flow vulnerability. Reflecting the highly fragmented industry and a large number of small builders, the average firm profit is a little over $70,000 per annum. Insolvencies are high, and higher in booms than busts.
Extensive subcontracting shifts the risk of market volatility down the supply chain. That is, the “builder” can rapidly increase or decrease their labour inputs at little cost. As subcontractors, trades have no industrial protections and work simply dries up during downturns. Subcontracting operates as a safety valve for market volatility, but industry fragmentation does not provide an institutional environment inducive to workforce development and building code compliance.
This context suggests builders would be interested in measures that would increase their profitability. Indeed, advocacy to reduce regulatory burden indicates profitability is of concern.
Builders understand market volatility is highly problematic and limits their ability to pursue efficiencies. The Housing Industry Association, for example, has said:
Stable and reliable economic and population settings are needed. Putting the industry through boom bust cycles, does not help with maintaining a skilled workforce needed to build sufficient homes for the population’s needs. It exacerbates trades shortages in boom cycles and creates skill atrophy in bust cycles… The deeper these boom bust cycles are, the more adverse the outcome is for the industry. Fiscal, monetary, and population settings have a strong influence on the depth of these cycles.
But does this mean the industry is willing to tackle the problem? The industry is comprised of a relatively small number of larger builders, and a very large number of small builders. While margins are low, the larger builders make small margins on large dollar value contracts. So, they are making sufficient profit to induce inertia. The small builders, who make low margins on low value contracts, have little agency.
This leaves industry leadership, which is fragmented. Industry peaks have been quick to support countercyclical measures such as stimulus packages, although, as the builders in the research said, the homebuilder grant fueled cost inflation already rampant because of pandemic induced supply chain disruption. Commencements in the detached sector went from 57,830 in January 2020 to 105,368 in January 2023, with a corresponding rise in the number of insolvencies, and a subsequent downturn as the grant program wound down and interest rates rose.
Industry peaks far more rarely call for measures to cool the market, as house price falls undermine demand for new housing. The peaks have consistently supported negative gearing and capital gains tax concessions, again as this is believed to support demand.
The irony is that these measures support investor demand, which drives the booms that put so many builders under intense pressure and drives insolvencies. Each boom inevitably ends in a crash, driving more builders to the wall.
So, the question is: why do building peaks support such measures? They are concerned that a multi year demand shortfall is more dangerous than short term volatility. That is, declining demand from homeowners is the greater threat; thus, a source of demand is required, hence support for landlordism. Ironically, a lot of builders are only just holding on right now because of social housing investment. At this point in time, building peaks need to ask themselves if the increasing frequency and intensity of boom-bust cycles really mean short-term volatility is less dangerous?
This brings us to government. Successive governments have retreated from social housing and actively encouraged the financialisation of housing (turning homes into financial assets). This created the problem building peaks have reacted to, but it has become a vicious circle.
The Albanese government has taken a vital first step in rebalancing opportunities in the housing market. Some renters will become homeowners. But rather than an expensive, insecure private rental market, social and non-market housing needs to be expanded to cater for households locked out of homeownership and premium institutional build-to-rent.
