It’s been called a ‘profitless boom’ — why are builders collapsing despite huge demand for homes?

Two major building companies have gone into liquidation in as many months in South Australia, leaving hundreds of home buyers in limbo, their unfinished properties left looking like ghost towns.

Given the demand for housing across the nation in recent years, it seems a paradox that homebuilders are collapsing.

So why are these companies hitting brick walls, and will there be more to come?

Which companies have gone under?

The collapse of Felmeri Homes earlier this year had impacts at a grassroots level and led to political fallout.

The company went into liquidation in July, leaving about 20 homebuyers with unfinished properties at O’Halloran Hill in Adelaide’s south.

The half-built homes were without essential services or an access road, with would-be residents urging state and local government to step in.

But less than a month after the SA government agreed to do that, and said it would build the required road, it was yesterday revealed that another company — Qattro Built — had also been placed into liquidation owing more than $4.5 million to unsecured creditors.

The company has more than 200 projects with a total value of more than $110 million under construction or in a pre-construction stage, according to the liquidator.

What is causing the collapses?

To an extent, it seems that builders have been victims of their own success — or at least, demand for their services.

The current appetite for new builds has led to companies over-committing themselves to housing projects, and leaving them vulnerable to changes in rising labour and materials costs.

“They signed up contracts for fixed prices and then we had massive price rises over the last couple of years, up to $100,000 on some buildings, so house and land packages,” Housing Industry Association (HIA) regional director for SA, Stephen Knight, told ABC Radio Adelaide.

“We’ve called it a ‘profitless boom’ for a lot of builders.

“They’ve been so busy and under stress and demand but they haven’t been able to make any money, and I think that’s what’s really caused the issue with the latest builder [Qattro] going down.”

Mr Knight linked that trend to the pandemic.

“If you go right back to COVID and the Home Builder grant, when we had a massive demand for building, I think that’s really what’s put the pressure on the builders now or over the last couple of years,” he said.

In Qattro’s case, both the company and its liquidators have pointed the finger at several factors, including supply and labour shortages.

“Qattro Built has faced increasingly challenging operating conditions that have affected the entire industry,” appointed liquidator Duncan Powell said.

Cash flow, rather than the viability of the projects themselves, is the challenge, Qattro’s managing director Bradley Jansen said on Tuesday.

“There is too much cash stuck on near-completed projects to meet the immediate obligations of the company,” he said.

“New projects secured are profitable, however the existing projects with underwater fixed price contracts are still weighing too heavily on the ability to get to the other side.”

Mr Jansen said it had been “heartbreaking” to see such a “high volume of builders and supply chain collapses” across the state and country.

“It is a deeply troubling time for the sector when shortage of housing supply is in lock step with supply side degradation,” he said.

How does SA compare to other states?

The problem is not limited to South Australia — in fact, some say the state has fared relatively well compared to other jurisdictions.

According to ASIC, 1,709 construction companies across the country entered administration between July 2022 and April 2023, up from 1,284 in the same period 12 months earlier.

And it isn’t just company collapses that are causing headaches — parts of the country have also been beset by construction delays and contract terminations.

Premier Peter Malinauskas has said he is not concerned with the broad state of the sector in South Australia.

“It’s true that the profitless boom that was experienced during post-COVID on the back of the Home Builder program was a big challenge for a lot of builders around the country, and you’ve seen a number in a bit of trouble as a result of that,” he said.

“[But] South Australia has actually been performing far better than other jurisdictions when it comes to the number of builders being impacted or going into administration, far less than the other states, so we’re in a better position relatively.

“The thing that worries me the most, and I care about the most, is the capacity to build all the extra homes that we need in South Australia.”

Is demand an issue?

Not according to the premier. 

“We’ve got more demand than we can poke a stick at. And that’s going to be here for some time to come,” he said.

A recent industry snapshot from the HIA reported that South Australia was “the only state to see an increase” in new home sales in July.

While the figures fluctuate, the report – compiled from a monthly survey of the largest volume home builders in the five largest states – showed sales in SA in July increased by 35.5 per cent compared to June.

Mr Malinauskas said data showed South Australia was “leading the nation when it comes to new home sales”.

“And that’s data that’s been released on the back of the state government abolishing stamp duty for new home builds in this state,” he said.

While the HIA expects the demand for new home construction to decline significantly next year, Mr Knight said the federal government’s new Housing Australia Future Fund would help the industry in the long term.

“These builders can look ahead and know there’s a steady stock pipeline of work coming up, but I can’t see much of it getting off the ground until late next year at the earliest,” he said.

“We’d love to have it ready to go but I just think we’re going to have a bit of a lull next year and then we’re kicking it off again.”

Will more builders go under?

Mr Knight is optimistic that more builders won’t face the same fate as Qattro and Felmeri.

“I would say perhaps the worst is almost over — I wouldn’t say completely over — but a lot of that work at least is almost finished,” he said.

“We’d expect early next year that those kind of contracts would have worked their way through and some builders are already telling me they’re through that and they’re now into more profitable work.

“So I’m optimistic that things are going to be not so bad for the near future.”