NSW residential construction costs continue to rise at alarming rates. In the period 2020-2021, the average increase in construction costs for an average residential home rose by 20%. Since 2021 they have risen, annually, at approximately 10.3%. In NSW there was a 4% rise in building costs during the 3 months to September 2022. Although this increase is predicted to slow down somewhat, predictions are an increase of 5% to 7% in construction costs in NSW during 2023-2024.
There has been a backlog of construction which was caused during Covid 19 and the catch up on that work has increased demand for construction materials and trades which has resulted in increased prices. Also due to disastrous floods and fire in the last 3 years there has been an extra demand in re-build and repair work resulting in a reduction of available trades and great demand for construction materials.
All of this has created problems for both Builders and Home Owners. Builders are currently facing the dilemma that Building Contracts for which they have quoted, and signed Contracts in late 2021 or early 2022, are now substantially underpriced and when completed the builder’s profit margin will be significantly reduced and, in some cases, the costs of completing the residence will result in a net loss to the Builder. Builders cannot continue to absorb such reduced margins, or losses, as this effects their ability to purchase materials and maintain reliable tradesmen. Builders entering into new Contracts must therefore inflate their Contract Price so as to anticipate and absorb the rise in construction costs during the building period.
This cycle continues to increase the construction costs
of the average residential home forcing Home Owners to
borrow more when interest rates are continually rising.
Many building firms caught up in this construction cost cycle are being forced into liquidation, leaving Home Owners with half constructed homes, drawn down building loans and no effective redress.
Home loan lenders should be encouraged to be more flexible and more forward thinking in the way they structure building loans. Instead of insisting on Fixed Price Contracts where the building price may have been artificially inflated above what will be the ultimate construction costs plus builders margin, lenders could approve advances on a costs plus basis with approval extending beyond the quoted price to allow sufficient additional funds to be drawn down, if and when required to meet the final cost.
Alternatively, if lenders continue to insist on Fixed Price Contracts they should either require that the borrower retain a significant proportion of their equity deposit to cover anticipated increases or alternatively to approve loans based on the Fixed Price Contract but with an additional drawdown facility which may or may not be used but remains available if needed when and if the Contract Price is exceeded.
Home Owners should be careful not to borrow to their approval limit when entering into new Residential Constructions Contracts.