As builders collapse, consumers are left with lost deposits and unfinished homes. Picture: supplied
RING-FENCING may be the way to go to protect new homeowners’ money if a builder collapses, one UNSW market researcher says.
Dr Brad Hastings is an Insights Associate at the UNSW’s Business Insights Institute which provides economic and business data to government and business.
In an analysis of the industry, he notes that amid unprecedented demand for new housing, construction companies are “collapsing like houses of cards, leaving consumers with lost deposits and half-finished homes”.
“Australia needs to build new homes (but) something’s broken in the residential construction sector,” Dr Hastings says.
“When a homeowner places a deposit with a builder, this money can be spent for any purpose,” he says.
“… when compared to other major investments that Australians will make in their lifetime, protection for their funds is limited.
“Indeed, builders can – and do – spend consumer deposits in any way that they please,” he explains.
“In some cases, there have been stories of builders on luxurious holidays at the same time as homes go unfinished,” Dr Hastings says.
“It seems nonsensical that consumer deposits can be used for purposes outside their intended use.
“Builder accounts are opaque, and it is very hard to know where the money goes. There is little incentive or need for homebuilders to spend money on the project for which it is intended,” he says.
Dr Hastings has a suggestion to improve protection.
“Financial services firms already provide a template for ring-fencing consumer funds and ensuring that money is spent for its intended purpose,” he says.
“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.”
Dr Hastings says that in the case of a builder going bust, such money would still be used 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.”
OTHER PROBLEMS
He also highlights another problem with builders experiencing tight cash flows apart from delaying payment to suppliers.
“More often, given the cash flow pressures across the industry, consumer deposits from one project are used to complete prior commitments,” Dr Hastings says.
Another remedy is to take on more projects because these new deposits will increase cash flow in the short term.
“This means that troubled builders put more consumers at risk, thus becoming a classic Ponzi scheme – until it falls over,” he says.
Dr Hastings points to housing demand being driven by high immigration (with 2023 recording 518,000 immigrants) and decreasing family sizes.
On the supply side, he noted, new home projects are falling with 2024 data for new dwelling starts now at 10-year lows.
“Overall, the ratio of new population to new dwelling approval is the worst since data began to be recorded in 1984,” Dr Hastings says.
He says that, according to ASIC data, in the 2023-2024 financial year, 2832 builders went insolvent, a trend that is worsening, he says.
“These are not small or newly established companies, either.
“Several industry-revered names have gone under, including Clough Group, Probuild, and Porter Davis Homes.”
