The Aussie dream of home ownership could be under threat as the construction sector faces an unprecedented crisis, with thousands of builders going bankrupt and leaving homeowners in financial distress.
ASIC data revealed that 2,832 construction companies went into insolvency in the 2023-2024 financial year, the highest proportion across all sectors.
Dr Brad Hastings, Insights Associate at the UNSW Business Insights Institute, warns that the current situation highlights the significant gaps in consumer protection for one of life’s biggest investments.
“For consumers, embarking on building or renovating a home represents a large financial commitment,” Dr Hastings said.
“However, when compared to other major investments that Australians will make in their lifetime, protection for their funds is limited.”
Dr Hastings said that this crisis comes at a time when Australia desperately needs new homes.
“Australia needs to build new homes,” he said.
“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.”
He said the high level of insolvencies comes from several factors, including COVID-19 disruptions, skilled labour shortages and rising raw material costs.
However, he also said there are structural issues within the industry.
“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,” Dr Hastings said.
The consequences for consumers are severe, with many left as unsecured creditors when builders go bankrupt he said.
“News is replete with stories of lost consumer deposits and half-finished homes,” he said.
He said that, unlike other sectors, the construction industry has little regulation regarding how consumer funds are utilised and protected.
“When a homeowner places a deposit with a builder, this money can be spent for any purpose,” he said.
“In some cases, there have been stories of builders on luxurious holidays at the same time as homes go unfinished.
“When a residential homebuilder goes bust, consumers become unsecured creditors and are at the bottom of the food chain after a lengthy insolvency process.”
To address these issues, Dr Hastings proposes a solution modelled on the financial services sector.
“Extending this protection to the residential construction sector would require setting up project accounts, where consumer funds reside until they are drawn down by builders and subcontractors and the work is completed to standard,” he said.
“In the event that the builder goes bust, this money remains in place to pay subcontractors and continue the build.
“A side benefit of this approach is that it may improve the robustness of the construction industry, providing homebuilders with a motive to ensure that each project stands on sound financial footing.”
