The Albanese Government’s ambitious plan to build 1.2 million homes over the next five years is looking increasingly untenable. Recent data from the Australian Securities and Investments Commission shows that corporate insolvencies have reached their highest levels since 2015, with the construction industry hit particularly hard. Leith van Onselen, Chief Economist at the MB Fund and co-founder of MacroBusiness, offers significant insight into this unfolding crisis.
August’s statistics reveal a worrying surge in construction company insolvencies, reflecting a multitude of factors including skyrocketing financing costs, soaring material costs, and a severe shortage in labour. “Relatively high interest rates on corporate loans—about 5½% on average for large businesses and 6½-7¼% for small- and medium-sized companies—and weak economic growth should see insolvencies trend higher next year,” warns Coolabah Capital’s Kieran Davies.
Van Onselen underscores that the Reserve Bank of Australia’s latest Financial Stability Review reveals that around one-third of home builders are losing money. This is not an insignificant figure by any means, given the government’s housing targets. He concurs with the review’s statement: “A sharp rise in construction input costs, compounded by costly delays arising from labour and materials shortages, as well as bad weather, has eroded profit margins on existing fixed-price contracts for many residential builders.”
One might think that the easing of material cost inflation is the silver lining here, but that relief seems short-lived. “The construction sector, in particular, is very reliant on insurance, and while price growth momentum in building materials is slowing, rising insurance premiums will be the next headache the industry will face,” adds CreditorWatch chief economist Anneke Thompson.
So, how does the Albanese Government plan on achieving an annual construction rate of 240,000 new homes over five years? As Van Onselen aptly points out, Australia has only once exceeded building more than 220,000 homes in a single year—in 2017, and that was under far more favourable economic conditions. He argues that the federal budget’s projected population increase of 2.18 million people over the next five years is simply unattainable under the current construction constraints.
Van Onselen strongly believes that the only viable solution is to moderate net overseas migration to historical levels. “Immigration must be lowered to a level compatible with the nation’s ability to supply housing and infrastructure, as well as environmental carrying capacity,” he says.
Not heeding this advice would mean Australia’s housing crisis and living standards would continue on a downward spiral. The construction industry is clearly under considerable strain, and it would be wishful thinking to believe that this sector alone can bridge the housing gap created by aggressive immigration targets and insufficient domestic housing supply.
The Albanese Government’s housing target is increasingly looking like a pipe dream. This is not merely a question of bad timing or poor execution but rather systemic economic pressures that continue to suffocate the construction industry. As Leith van Onselen astutely observes, a more sustainable and practical approach to housing and immigration is the need of the hour. Failure to address these issues head-on could lead to further deterioration in Australia’s housing availability and quality of life.
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The Albanese Government's plan to build 1.2 million homes in 5 years faces challenges due to construction industry insolvencies, high costs, labour shortages, & unsustainable immigration levels, risking Australia's #housingcrisis. 😓🏗️🏠 #TheIndianSunhttps://t.co/2yGl6i3FaB
— The Indian Sun (@The_Indian_Sun) October 17, 2023