Building industry in turmoil as another contractor collapses

Melbourne-based construction contractor Ciccone Constructions has placed itself in administration, just a week after the collapse of one of New South Wales’ biggest homebuilders, Beechwood Homes.

Ciccone’s collapse is likely to hurt listed property developer Peet, which is based in Perth. Ciccone was working on civil engineering work at Peet’s Innisfail project at Point Cook, just outside of Melbourne. Peet said in a statement to the Australia Stock Exchange it is talking with Ciccone’s administrator about completing work on 134 remaining blocks, but any delays may drag down Peet’s 2007-08 profit.

So what is going wrong in the building industry? Given the demand for housing, how can builders be falling over around the country? Phil Dwyer, president of The Builders’ Collective of Australia, says that builders are being squeezed.

On the one hand, compliance, materials and labour costs are have continued to climb after rising 71% from 2002 to 2005.

On the other hand, fierce competition and different insurance rules for different builders (big estate builders and owner/builders pay little or no warranty insurance, while small and medium operators pay thousands of dollars per home) has led to undercutting. “The insurance issues have created a very anti-competitive situation and that has suppressed prices,” Dwyer says.

Demand isn’t as strong as it might seem either. The chief executive of policy at the Housing Industry Association, Chris Lamont, says that while there are plenty of first-home buyers who want to build new homes, there are not many that can actually afford to.

He gives the example of Sydney, were the average first-home buyer might have a maximum of $600,000 to spend. The scarcity of land and rising compliance costs have pushed the price of a block up to $350,000, which means the builder must try and put together a home package for around $250,000. “That’s proving to be a real struggle given the rising labour and material costs,” Lamont says.

Rising interest rates are also hurting builders. Lamont says that while there is finance around for building companies, any delays to a project – for example, through the planning process – lead to increased costs. “If your project is being held up by six months, that’s six months of holding costs at the higher interest rate. Given that house and land packages are generally fixed prices, that cost has to be absorbed by the builder.”