Australia’s residential construction industry is in dire need of stability as builder bankruptcies rise, leaving many consumers in financial turmoil, according to UNSW Sydney.
Despite a pressing need to build more homes due to population growth and decreasing household sizes, building commencements are at a 10-year low.
According to ASIC data, 2,832 construction companies went into insolvency during the 2023-2024 financial year, and the trend continues to worsen.
Industry giants such as Clough Group, Probuild, and Porter Davis Homes have all gone under, leaving thousands of homeowners with unfinished projects.
The construction sector’s ongoing struggles are driven by slim profit margins and fixed-price contracts, making it difficult for builders to absorb rising costs in materials and labour.
Builders have been operating with negative cash flows, leaving suppliers unpaid and projects abandoned.
“Something’s broken in the residential construction sector,” said Brad Hastings (pictured above) of UNSW Business Insights Institute.
The Reserve Bank had previously warned of financial pressures across the industry, predicting the insolvencies we’re seeing today.
When a construction company goes bankrupt, consumers often lose their deposits and are left with half-finished homes. As unsecured creditors, they sit at the bottom of the priority list during insolvency proceedings. While builder insurance is mandatory in most states, it offers limited protection – claims cannot be filed until five weeks post-insolvency, and coverage is often capped at 20% of the build’s value.
In the case of Porter Davis Homes, the required insurance wasn’t even taken out, leaving customers with no safety net.
Subcontractors, often small or family-run businesses, are also impacted when builders collapse. Like consumers, they become unsecured creditors and are forced to absorb material and labor costs if they want to continue operating.
This systemic problem exacerbates the financial strain on the entire construction supply chain, UNSW reported.
Unlike other major investments like superannuation or banking deposits, home deposits are not protected in the same way.
Builders can use consumer funds for any purpose, often resulting in mismanagement. Stories have emerged of deposits being spent on unrelated expenses, leaving homes incomplete.
“It seems nonsensical that consumer deposits can be used for purposes outside their intended use,” Hastings said.
To address these issues, experts suggest implementing project accounts that ring-fence consumer funds. These accounts would ensure that deposits are only used for their intended builds, providing better protection if a builder goes bankrupt.
Such an approach could restore consumer confidence and improve the financial health of the construction industry.
Introducing stricter controls over consumer deposits could help stabilise the construction industry.
By ensuring that funds are held until work is completed, builders would be incentivized to maintain financially sound projects. This system could help prevent further collapses and protect both consumers and subcontractors from the fallout of builder bankruptcies, UNSW reported.
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