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ABC News
ABC News
Business
national regional affairs reporter Jane Norman

Thinking of building a home? Here's what you need to know about the crisis in construction

First-home buyers have been caught up in the collapse of a string of construction companies. (ABC News: Emma Machan)

Imagine you've saved a deposit, signed a contract with a builder, and watched eagerly as the foundations of your dream home finally began to take shape.

Then, you hear the news that the company has gone broke and work on your half-built house comes to a grinding halt.

That's the scenario facing thousands of Australians who were on the cusp of home ownership only to be plunged into a nightmare, leaving left them out of pocket or without a home to move into.

They're the victims of a string of high-profile insolvencies in the construction sector, which has shone a spotlight on the risks of buying a home before it's been built.

What should I expect if I buy from a developer?

Australia has one of the most expensive property markets in the world and a shortage of housing has seen the rental vacancy rate plunge to record lows of about 1 per cent in both metro and regional areas.

So a lot of first-home buyers turn to off-the-plan apartments and house-and-land packages because they tend to be cheaper than established properties, come with a fixed price, and often have government grants too.

If you're buying off-the-plan, you can expect to pay a 10 per cent deposit up-front and the other 90 per cent once the project's been completed (usually 12–24 months after the purchase agreement).

But there are often delays and here's the catch: you're locking yourself into a fixed-price contract so if the value of the property falls before it's finished, banks may not lend you the amount you need to complete the contract.

Purchasing a house-and-land package is a bit more complicated.

First, you'll need to buy the land from the developer — usually with a 10 per cent deposit — and then the house itself from the builder who will often ask for a 5 per cent deposit.

This requires two loans: a mortgage for the block and a construction loan for the build, which banks often bundle together into one fixed-price contract.

There are also "turnkey" packages that offer a house that's already built and ready to move into. The finance works just as a regular home loan would, plus you only have to deal with one party (not two).

Government schemes such as HomeBuilder and First Home Owner Grants and stamp duty exemptions can help reduce the overall cost, so it's worth doing your research.

What do I need to know before I buy?

You might be familiar with conveyancers who handle the purchase and sale of a property, but if you're building it can also be wise to engage a building or construction lawyer to read and explain the contract to you. 

This will involve an extra cost but it's probably worth it when you're spending upwards of $400,000 on a new home.

For example, adding a subject to finance clause to your contract could protect you from losing your deposit or worse — being sued by the developer — if you can't secure finance from your bank.

While we're talking about developers, do your research. Check out their project history (even visit one of their developments) and use your community to seek out more information. 

And last but not least: ask lots of questions! For example ...

Does the builder have compulsory insurance?

In every state and territory except Tasmania and the NT, builders are legally required to obtain insurance for all residential builds valued over a certain amount before they take a customer's deposit.

The name of the insurance differs in each state but the legal protections are the same, covering clients for a loss of deposit, failure to start or finish a job, or defective work.

So, before you hand over any cash, make sure the developer has taken out the compulsory protection.

But even with this insurance, customers can still be exposed to out-of-pocket expenses if their builder collapses.

Nathaneal and Ashleigh have been left with a half-built home in Victoria's Macedon Ranges following the collapse of Porter Davis. (Supplied)

First-home buyers Nathaneal and Ashleigh (who don't want to be identified) have been left with nothing but a timber frame on a slab of concrete in Victoria's Macedon Ranges after their builder, Porter Davis, collapsed in late March.

They're eligible to claim up to 20 per cent of the contract price for their "dream home" through the state's building insurer VMIA but that won't absorb the extra costs they're now facing to finish the build.

"Costs have gone up significantly and we're getting quotes up to $300,000 over what we initially paid," Nathaneal said.

"We've had to come to terms with the fact that we're going to lose our life savings."

Inside Nathaneal and Ashleigh's half-built home, exposed to the elements since the collapse of their builder Porter Davis. (Supplied)

How much am I being asked to pay up-front?

Nathaneal admits he was "naïve" about the process and paid the bulk of the contract up-front rather than in smaller progress payments as key stages of the project were completed.

"The Porter Davis contract we signed … enables the builder to dictate the progress payments so our contract was heavily front-loaded," he said.

"We got hit paying 50 per cent for 'frame stage' when, under a standard contract, it'd only be 25 per cent."

The HIA's deputy managing director, Jocelyn Martin, said securing a builder to take on a project halfway through was extremely difficult. 

"Nothing can protect the consumer from the devastation that comes with having a half-built home," she said.

Are there any hidden costs?

Before you sign on the dotted line, make sure your future home or apartment includes everything you would expect — from fencing and landscaping to carpets and tap fittings.

Some developers don't include these fairly essential features in the advertised price of their projects. Even curtains and built-in wardrobes are often excluded from the base price of a house-and-land package. 

There may be more things you haven't even thought about, which is why it's always worth building a buffer into your budget to help pay for these unexpected costs. 

Why is the construction sector struggling?

Insolvencies in the sector are reaching a 10-year high with fresh figures from the corporate watchdog ASIC revealing an average of five construction companies are collapsing in Australia every day.

Ms Martin said many homebuilders were struggling to stay afloat after locking in fixed-price contracts for houses during the pandemic, just as inflation sent the cost of materials and labour soaring.

According to figures from the Australian Bureau of Statistics, the average cost of building a new home has risen from approximately $327,000 to $450,000 in the past two years alone.

"The industry has been under enormous pressure," Ms Martin said.

"The HomeBuilder stimulus was really welcome by the industry but, of course, no-one could foresee all of the pressures that would come with that in terms of the supply chain, cost escalations, and the skills shortage."

Experts are expecting further insolvencies in the months to come but Ms Martin said she believed the sector was nearing the end of a rough cycle.

"We think we're at the tail end of that now and, as the effects of the HomeBuilder fall away, that pressure is coming off the industry," she said.

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