In this post I will be presenting the challenges and opportunities in the home building industry, including market trends, competitive landscape, and the importance of adapting to change.
Housing Demand and Demographics
Tim Reardon, the Chief Economist for the HIA, reported in February 2023 that the number of detached houses commencing construction is in decline and is at its lowest level since 2012. The Chief Economist further added that the increase in interest rates was sufficient to bring the boom experienced by industry players to an end. Future rate rises, Tim Reardon suggests, will accelerate the downturn.
There was a delay in this being felt by builders as the pipeline to May 2022, when rates started to increase, was full and there was a record number of homes under construction. Tim Reardon further states that by December 2022, new home starts had already fallen to the lowest level since 2012.
The numbers Tim Reardon is talking about are these:
Building Starts 2021 - 149,000 compared to 96,000 expected in 2024.
This is confirmed in another article by MacroBusiness which states the Australian Bureau of Statistics reported 240,000 homes under construction in the December 2022 quarter:
The main drivers for this explosion of new starts has been the historically low interest rates and the Federal (Morrison) Government COVID-19 Stimulus.
What I find interesting is the slowdown in completion rates. I have previously reported on the key issue of completing builds; if home builds are not completed on time it will result in significant erosion of margins. Here we see the completion rates moving against building approvals and commencements:
In this picture we see an increase in commencements, however completions have not increased, rather, lagging behind.
Economic Factors Impacting Home Building
Fast forward to today and the combination of the post COVID-19 challenges. This includes the delays in materials, slowing construction phases resulting in further cost increases that delays bring with them, increase in material costs given the basic demand exceeding supply equation, interest rate increases and the skills shortage, further increasing costs if builders want to retain or hire new starters.
Builders traditionally compete on price resulting in the tightest of margins, such that any slight increase in any one of these items will result in losses, ultimately meaning cash dries up.
It is therefore no surprise to see the stream of building collapses occurring in the industry. Porter Davis has left, according to unconfirmed news reports approximately 1,700 uncompleted homes. This number is set to increase given other collapses which have occurred after Port Davis shut its doors.
One of the obvious outcomes of this is the lack of confidence this will leave homeowners looking to start building their home feeling. Will the builder they have engaged follow the same path? Home owners warranty only covers so much and if home owners have a fixed loan to fund their home build, where is the extra cash needed to complete the build of their home coming from?
With every loser there is a winner
Economics also tells us that where there are losers there are winners. Which begs the question where are the opportunities? The winner here are the builders left standing. They will fast track their growth as the unfinished work left by builders who have collapsed and future demand for new homes will have to be finished or built by someone.
Without this we see the future of builders is looking bleak as the Australian Bureau of Statistics showing a fall in housing construction loans:
As discussed earlier the HIA has predicted new home sales dropping to its lowest levels for some time:
That’s the synopsis - inflation causing a rise in cost of materials and labour, a fall in demand with the reduction in existing pipeline of work. Demand for new starts has fallen, so the builders will be looking for work next year. It looks bleak for builders. It shouldn’t come as a surprise, after all it isn’t the first time, we have seen these collapses and the industry has managed to resolve them.
The economy has the ability to shift the allocation of scarce economic resources between actors in the marketplace. Surviving builders will pick up the slack predicted in the future pipeline. This should now take pressure or demand away for materials and skills shortages. This means that costs may stabilise providing some comfort to builders who lock in fixed priced contracts.
I have already discussed the outcome of the building collapses is the quantity of unfinished homes. This demand will be picked up by those builders who remain stable and capable of completing the work. Of course, the original contract with the builder that collapsed is no longer capable of being fulfilled. New contracts, and new prices must be agreed. The builders left standing will be able to now price in the increase in materials and labour.
Not all homeowners will have the capability of paying the new price. This will involve another conversation with their banker. The chances of equity being available in the land is not as strong as it was say, 6 months ago given the flattening of the property market. Those who can borrow more will see a shift of wealth from the homeowner to the newly contracted builder. This will then enable the new builder to manage the rising costs.
Suppliers and contractors will also gain from the additional work.
This presents current builders with an opportunity to reassess how they price.
Competitive Landscape - Market Players and Competition
There are a lot of builders in the market place. As of 2023, according to IBIS World there are approximately 53,010 house construction businesses in Australia. IBIS reports 75% of the industry is made up of a many number of small scale owner operator builders.
Given the high concentration of small-scale operators, the market can be said to be highly competitive, meaning if you are pricing well a competitor can come along and undercut you. The industry is also labour and material intensive; as a percentage of revenue, wages (9.2%) and purchases (71.9%), compared to rent and utilities (4.2%).
As discussed above the key external drivers of the industry include:
- Dwelling commencements
- Mortgages and mortgage affordability
- Residential house prices
The major markets include:
- Private homeowners
- First-time homebuyers
- Property developers and speculators
- Public sector housing
Differentiation and Unique Selling Propositions
As noted, the construction industry represents a highly competitive or as the economist says, perfectly competitive - that is to say that there are many buyers and many sellers and prices reflect supply and demand.
I have suggested in previous posts that businesses compete at two levels – businesses are either the lowest cost producer, in this case a builder operates with operational excellence or on the other hand the builder differentiates on its product. In the end the home builder, you, must answer the question:
Why would someone buy from me?
Often when I ask this question, I get these answers:
- I do build, differently
- I offer good value for money
- I build spacious, open interiors and attractive exteriors
- My builds have energy-saving features and quality materials
- I’m always on-time with delivery
- I provide great after sale service
To get the answer as to what makes you different you need to take a deep dive. Ask yourself:
- Why do I build?
- What is my vision?
- What are my values?
- What is my personality?
- What do I promise?
- What is the emotional connection I have with clients and our work?
Then you might get close to the differentiator. Your story and your competitive advantage is what makes you different.
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