For the building industry, the COVID pandemic has not only led to the restriction of works on site. We have also faced significant increases in build costs and extended delays in the supply of materials. You may have heard of these issues already, there has been some reporting of them in the media.
These build cost increases and delays are being caused by a perfect storm of different circumstances that are driving an increase in demand and decrease in supply. What are these different circumstances and what can you do about it?
What’s driving increased demand?
There has been an increased demand for building new homes and home renovations across Australia and internationally. The key factors driving that increased demand are:
- The Government’s Home Builder Grant – the $25,000 grant that was available to eligible owner-occupiers to build a new home or substantially renovate an existing home.
- Homeowners having more disposable income to spend on new homes and renovations, given the closure of borders for travel & holidays.
- Homeowners working from home and the likelihood that this will continue, increasing the importance of a functional and comfortable living and working space.
- COVID financial stimulus packages in the United States and Europe.
- Latent demand for new homes in the US due to the GFC recession slow down hitting the market as the US recovered.
These factors have increased demand for residential building. For example, the Australian Bureau of Statistics has reported that, in the March 2021 quarter, there was an almost one-fifth (18.5%) increase in total value of alterations and additions in Australia.
Why are there restrictions in supply?
There have been restrictions in the supply of building materials both domestically and internationally (affecting imports). And it’s not just timber that’s affected. In Australia, we have also seen shortages of steel, aluminium, plasterboard, plumbing fixtures and mechanical & electrical parts as well as long delays for some imported building materials.
From our research, the key reasons for the domestic and international restrictions in the supply of building materials are:
- Bushfires affecting timber supply and the operation of timber mills (there was a reported loss of approximately 10% of plantation timber in bushfire events).
- Flooding restricting the ability to log and transport timber to timber mills.
- Impacts of Covid-19 on overseas suppliers and logistics operations.
- Shortages of shipping containers and ocean traffic blockages (g. Suez Canal).
- Bad weather, power cuts, maintenance periods and labour strikes in China and Europe.
- Decreased productivity domestically and internationally due to Covid restrictions.
- Limited raw material availability.
- Train derailments on the Nullarbor in 2021.
These graphs show the recent increase in goods consumption & global shipping prices [Source: ABS, RBA]
How bad is it?
These supply and demand issues have impacted different materials differently. As an example, we have seen price increases of 30 – 45% for timber (some framing timbers have doubled in price!) and 30 – 35% for steel; lead in times for windows & some joinery stretching out from 4 weeks to 12 weeks; and bricks taking up to 4 weeks longer than normal. Recently a plumbing retailer reported that more than 70 suppliers had increased prices across a range of products by up to 30%. And we’ve just received an email from our silicon supplier alerting us to a 45% price increase that will come into effect next February.
Not only has there been higher price increases than normal, we’re also seeing more frequent price increases.
In addition, some suppliers and subcontractors who were previously willing to lock in their pricing for many months are now not willing to do so even if you pay a deposit. This is a problem for larger projects as some items are not required for some time (e.g. stairs), and as a result, the builder will not know the actual cost of these items until well after the fixed price building contract has been signed.
More recently, we have had several subcontractors who have had to isolate because they or their employees have either caught COVID or are primary contacts. We assume this is a natural consequence of opening up again when COVID is still circulating in the community. This has the potential to delay projects.
What can you do about it?
Whether you are just starting out on your building journey or your new home is already underway, the most important thing to do is to have an open conversation with your builder.
Discuss the impact that these price increases and supply constraints may have, or are having, on your project and what strategies and mitigation plans they have in place to manage these risks. We welcome these conversations with our current and potential clients.
We have heard of builders walking away from projects because it is no longer economic for them to complete the works. Also, the Australian Financial Review has reported that construction industry insolvencies have jumped nearly 40% in the 3 months to December 2021 from the previous quarter.
So if you haven’t appointed a builder yet, do your homework and satisfy yourself that your builder is financially well managed and has priced your project correctly. A cheap price could be a red flag.
Our other key recommendation is to select your fixtures and fittings as early as possible and be flexible. With longer lead in times now, leaving selections to the last minute may limit your options and cause disappointment. For example, if you would like imported tiles from Italy, your builder will need to know well in advance so that they can be ordered and delivered on time. You may need to be prepared to consider alternatives if the lead in times for your first choice selections are not feasible for your project timeframe.
Also, as builders, we appreciate your understanding. We are doing our best to continue to deliver dream homes within desired time frames and budgets. We continue to work very hard in the background securing supplies, mitigating price increases and juggling job schedules whilst also ensuring ongoing compliance with changing COVID rules and restrictions.
What’s the Government doing about these issues?
The Victorian Government has appointed Anna Cronin (Commissioner for Better Regulation) to review supply chain issues facing Victoria’s building and construction industries and recommend ways for the Victorian Government to address them. We are looking forward to seeing her report.