The NSW Construction Reform Strategy

 Compliance and quality in new residential buildings

 

The National Construction Code (NCC) is a performance-based regulatory system that provides the standards buildings must comply with, supported by reference documents from Australian Standards, the Australian Building Code Board (ABCB), and other protocols and standards. The Building Code of Australia (BCA) sits within the NCC and is given effect by state and territory legislation. These regulations cover building work, products, and registration or licensing requirements for practitioners, and their objectives are the proper construction of buildings and the health and safety of the people using those buildings. Although construction is extensively regulated through the NCC under both state and federal legislation, during a boom in apartment building after 2014 the number of defects in these new buildings became a major issue. 

 

Figure 1. NSW apartment building

Source: ABS 870102. 

 

After a series of building failures highlighted widespread lack of compliance with the NCC, Bronwyn Weir and Peter Shergold were asked to investigate. Their report in 2018 Building Confidence: Improving the Effectiveness of Compliance and Enforcement Systems for the Building and Construction Industry across Australia found: 

• Compliance failures included non-compliant cladding, water ingress, structurally unsound roof construction and poorly constructed fire resisting elements; 
• Practitioners may lack competence and do not understand the NCC; 
• Design documentation was generally poor and resulted in inadequate information; 
• Licensing bodies, regulators and local governments were inadequately funded or lacked skills and resources; and 
• Supervision has generally been by private building surveyors who are not independent from builders and/or designers. 

 

The report made 24 recommendations. Recommendation 1 was for registration of building practitioners involved in the design, construction and maintenance of buildings, and 10 was for building surveyors. Recommendation 3 was for practitioners to undertake compulsory Continuing Professional Development on the NCC. The key recommendations 6 and 7 were for effective regulatory powers and proactive regulation, with mandatory inspections (recommendations 18 and 19), and recommendation 21 for compulsory product certification. Recommendation 8 was for a design review relating to fire fighting, and 17 was for an independent third-party review of the designs before work commences. Other recommendations were 12, for a building information database that provides a centralised source of building design and construction documentation, and 20 for a building manual for commercial buildings to be available on completion. 

 

These recommendations addressed the serious problems of building defects and non-compliant materials that were the primary motivation for the Building Confidence report. The report concluded ‘The compliance and enforcement systems have not been adequate to prevent these problems from emerging and they need to change as a matter of priority. There is no panacea or ‘silver bullet’ to resolve these problems. Our 24 recommendations … will address weaknesses in a … pragmatic, risk-based approach’ (p. 4). 

 

The scale of the problems of building defects in new apartment buildings built after 2015 required a new regulatory approach, and the Construct NSW reform strategy was the result.

 

The NSW Reform Strategy 

 

The New South Wales Government responded to the Building Confidence report with the Construct NSW strategy, which had six elements: regulation, key player ratings, education, contracts, digital tools, and data and research. In 2019 the Berejiklian Government established the Office of the Building Commissioner (OBC) to implement the reform strategy and appointed industry veteran David Chandler as Building Commissioner. In 2020 two significant pieces of legislation to regulate new construction work were introduced. With these Acts the Building Commissioner could audit building plans, monitor and scrutinise suspected wrongdoing, and take disciplinary actions such as suspending or cancelling registrations, refusing to issue occupation certificates, and ordering rectification of non-compliant building work.

 

The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB Act) allowed the OBC and Department of Customer Service to investigate building work and require rectification of defects for up to six years after the occupation certificate was granted. The Department can delay issue of an occupation certificate until identified issues are addressed, and these orders are public while they remain in force. The definition of a ‘serious defect’ in the Act is a failure to comply with the BCA, Australian Standards or approved plans. The RAB Act gives the Building Commissioner powers to enter construction sites and issue orders for the rectification of serious defects before occupation certificates can be given.

 

The most significant power requires developers to sign enforceable undertakings that the developer refrain from certain conduct which contravenes the Act or take action to prevent or remedy a contravention of the Act. A Building Work Rectification Order requires developers or principal contractors to remediate serious defects prior to the issue of an occupation certificate, and a Stop Work Order is issued if the Building Commissioner is satisfied that work being done could result in significant harm or loss to the public or occupiers of the building.

 

The second piece of legislation was the Design and Building Practitioners Act 2020 (DBP Act), which had three requirements:

1. New registration requirements for designers, engineers, specialists and builders to show they are adequately qualified;
2. To require designers to lodge building designs before construction starts, and builders lodge ‘as-built’ plans upon completion. Builders must also declare that the completed building complies with the lodged designs and the BCA. The requirements on practitioners to register, lodge plans and make declarations came into force in July 2021; and
3. A statutory duty of care for practitioners, so owners can sue if a person who carries out construction work fails to exercise reasonable care to avoid economic loss caused by defects. The duty of care has been in force since June 2020 and applies retrospectively, where economic loss has become apparent in the 10 years prior to 2020.

 

The DBP Act imposed a retrospective statutory duty of care to avoid economic loss caused by defects or construction work. It applies to professionals who perform construction work including builders, designers, product manufacturers and suppliers. In July 2021 the second stage of the Act introduced compulsory insurance, declarations to be given by designers and builders to ensure compliance with the BCA, and a registration regime for engineers. 

 

Also, in July 2020 the Building and Development Certifiers Act 2018 and the Building and Development Certifiers Regulation 2020 came into effect, with stronger conflict of interest provisions and penalties for breaches by certifiers. The Act and Regulation include similar provisions to those in the DBP Act for building and design practitioners to be registered, for suspension or cancellation of registration, and having adequate and current insurance. The NSW Department of Fair Trading provides a certifier practise standard, a condition of licence for all certifiers working on multi-storey Class 2 buildings [1].

 

Another initiative was micro-credential TAFE courses being offered to practitioners. There are now three dozen of these courses available, ranging from asbestos to waterproofing, with courses specifically on the NSW legislation and its operation, the NCC, and fire and rescue requirements.

 

Further Developments 

 

Since the legislation in 2020 there have been two other NSW Government policies introduced, two court cases, a Strata Hub and a Defects Library created. A new agency was formed when the Building Commission NSW commenced on 1 December 2023, bringing together the Office of the Building Commissioner and NSW Fair Trading building functions into a single specialised organisation focused on quality and compliance of residential buildings employing over 400 people.

 

In November 2022 the NSW Government started Project Intervene, a program to resolve serious defects in the common property of buildings that are up to ten years old. The Department of Fair Trading negotiates a legally binding undertaking with the developer for the benefit of the owners corporation. A building is not eligible for Project Intervene if the developer or the builder are no longer trading. Under Project Intervene, there was no cost to the owners corporation as the developer pays for the remediation works and all associated costs. Other defects might be remediated at the same time but are agreed to separately by the developer. An owners corporation could register for the program up to 30 June 2023, and 152 buildings registered involving 14,523 apartments.

 

Project Remediate was a 2022-2024 program to help remove combustible cladding on an estimated 225 buildings, of which over 135 are in process. It is a voluntary (opt-in) program that only fixes flammable cladding and offers a 10-year interest-free loan to fund remediation work [2]. Government support is provided to owners corporations through quality assurance and program management services, with a $10,00 to $15,000 payment to help cover strata management costs for participating in the program. 

 

In 2023 the NSW Court of Appeal in Roberts v Goodwin Street Developments confirmed an earlier Supreme Court decision that building practitioners owe a statutory duty of care under the DBP Act for all building work, not just residential building work or work on a Class 2 Building. The decision also confirmed owners can hold project managers, superintendents, directors and shadow directors personally responsible for building defects. 

 

The decision in Roberts extended the RAB Act’s definition of a serious defect to all buildings and the duty of care of individuals was confirmed. However, when designing a project, a number of designers and consultants will be involved, some of whom may work for one firm. How the duty of care is allocated between individuals that sign certificates and professional services firms that are contracted for work on a project was not clarified. The uncertainty around this issue was a factor in the significant increase in Professional Indemnity insurance premiums. 

 

In 2024 an Owners Corporation of a residential strata building brought proceedings against Pafburn (head contractor) and Madarina Pty Ltd (developer) for alleged negligence leading to defective construction work and breaching the statutory duty in the DBP Act. The High Court of Australia in Pafburn Pty Limited v The Owners – Strata Plan No 84674 considered whether a developer or head contractor can reduce their liability when faced with claims and found head contractors cannot delegate works to avoid liability. 

 

The NSW Strata Hub was another initiative, establishing a register of strata schemes with information on the number of lots, the occupation certificate, strata scheme management information (committee secretary, strata manager, building manager, the annual general meeting) and the scheme’s energy and water performance rating where available. 

 

The Building Commission has created an online Building Defects Library that lists the most common building defects for Certifiers, Councils and other relevant industry members to help drafting of formal communication to rectify defects.

 

Developer and Contractor Ratings

 

Another element in the NSW reform strategy was the introduction of a ratings system for developers and contractors. This is called iCIRT (independent construction industry rating tool) and uses data on creditworthiness, insurance history, regulatory breaches and legal claims, to assign a rating available to government, industry and the public. Developed by Equifax, a credit rating firm, iCIRT ratings are based on a relative risk ranking. Businesses are assessed relative to others that share the same role (i.e. builders are compared with builders) and size (i.e. small firms with small firms) and a Development Risk Index compares a business to the industry average. These ratings are based on six criteria:

1. Character: the business, its directors and key persons, the holding company, related parties, shareholders and owners;
2. Capability: the tenure and trading history of the business and officeholders experience, licences and qualifications, the track record on previous projects and insurance and claims history;
3. Conduct: includes the commercial history, court judgments and litigation, industrial disputes, tribunal decisions, payments to employees and subcontractors, and any regulatory intervention;
4. Capacity:  the project pipeline and capacity to meet commitments, business solvency and ongoing sustainability;
5. Capital: capitalisation and funding sources, access to funding and borrowing capacity; and
6. Counterparties: the exposure of the business to related parties in the supply chain and capacity to withstand disruptions.

 

Equifax and iCIRT provide a star-rating outcome from zero stars (unrated) to five stars (more trustworthy) and there are three levels of assessment. Gold Ratings are a detailed assessment where the business and/or build team have fully participated and provided all requested disclosures for a comprehensive review, including key person consents for expanded background checks. Silver Ratings are a standard review where the business and/or build team have provided a number of required disclosures, with key person consents to basic background checks. Bronze Ratings are a brief review using all available public and proprietary data that does not require consent or the participation of the rated business or build team, with no key person checks. 

 

Despite ICIRT’s role in improving accountability and trustworthiness in NSW construction getting a rating is voluntary, as is making it publicly available once acquired. By February 2024 there were 163 builders and developers, plus a few architects and others, listed on the ‘Register of Trustworthy Constructors’. About a dozen had been withdrawn or not renewed and several were waiting for updates. 

 

In a LinkedIn post on Feb 6^th David Chandler said ‘The number of iCIRT rated builders and developers continues to grow. Recent statistics indicate that over 35% of builders and developers with turnover greater than $5.0m pa are now rated. These statistics further indicate that over 50% of developers and builders by volume are iCIRT rated in NSW.’

 

Decennial Liability Insurance

 

Decennial liability insurance (DLI) is an insurance product that enables owners corporations to have a serious defect fixed up to ten years after an apartment building is first occupied. With DLI the work is done without litigation to establish fault, removing a major barrier for owners corporations. In November 2022 the Building and Other Fair Trading Legislation Amendment Bill made DLI an option for developers of multi-storey apartment developments in NSW, so a developer with DLI will not be required to provide a building bond. NSW is the only Australian jurisdiction where DLI is offered, although it is available in over thirty countries.

 

DLI provides residential apartment owners with comprehensive consumer protection for building defects caused by substandard design and building work. It ensures that building owners can remediate those defects because the costs are covered by the insurance policy if a builder or developer is unable or unwilling to fix the defects, including if the developer becomes insolvent. There is currently one provider of DLI, Resilience Insurance.

 

DLI increases involvement of insurers in the design and construction of projects as they take a more active role in monitoring projects through technical inspections, site investigations or due diligence. Regular, independent technical inspections are the basis of DLI, and premiums for highly rated developers and builders should be lower than those with a lower rating and/or a history of buildings with defects. 

 

A fundamental problem had been a lack of supervision to ensure and maintain the quality of work on residential building projects. For contractors, responsibility for compliance with relevant codes and practices requires supervision from the issue of the construction certificate to hand over to the client. For developers, supervision is required to prevent an order under the RAB Act that will damage their reputation and affect consumer confidence in their product. With the ratings tools now available, the cost of independent design reviews and adequate supervision of work may be offset by reduced financing and insurance costs. 

 

Report on Progress in 2023

 

In 2023 a Review of the Implementation of Building Confidence recommendations was published by the Australian Construction Industry Forum, with details on the progress made on each recommendation across the states. Based on that report Bronwyn Weir gave an update on progress on the Building Confidencerecommendations in a webinar presented to the Australian Institute of Quantity Surveyors and the Australian Construction Industry Forum, reported by Andrew Heaton on Sourceable. According to Weir progress varied across jurisdictions. NSW was leading with increased compliance and enforcement and a proactive audit program. 

All states had or were working toward a compulsory code of conduct for building surveyors, and there had been improvements in accountability for performance solutions and performance-based design. The ABCB had developed model guidance so states and territories could implement recommendations in a nationally consistent way. On other recommendations implementation had been mixed. For example:

• Several states had broad schemes for mandatory registration of design and building practitioners, but none were as comprehensive as the National Registration Framework developed by the ABCB (recommendations 1 and 2 of the report).
• Only Tasmania required building practitioners to undergo compulsory continuing professional development on the NCC (recommendation 3).
• No state had instituted any substantive reforms to support career pathways for building surveyors and certifiers (recommendation 4).
• NSW and Victoria have increased regulatory compliance and enforcement action (recommendations 5, 6, 7, 9 and 11), Queensland and Western Australia have ‘light touch’ regulation.
• NSW had strengthened the role of fire authorities in building approval processes, however no state had instituted a code of conduct for fire safety engineers (recommendation 8).
• NSW had and some other states were working toward centralised digital lodgement of building approval documents (recommendation 12), but Queensland, Western Australia and Victoria are not. The ACT and Northern Territory were already doing this. 
• No jurisdiction required a comprehensive building manual be handed over to owners on building completion (recommendation 20).
• There had been insufficient action on regulation of building product compliance. Only Queensland had a supply chain accountability law.

 

Table 1A. Summary of progress in 2023

Table 1B. Summary of progress in 2023

Source. Table provided to Sourceable by Weir Legal and Consulting

 

Surveys on Building Defects

 

The NSW Building Commission has done two surveys on defects in apartment buildings. The 2021 survey on defects in strata buildings over three stories that were completed in the previous 6 years found:

• 39% of strata apartment buildings surveyed had a serious building defect in the common property.
• Of the buildings with a serious defect, most were related to waterproofing (63%), followed by fire safety systems (38%), structure (27%), enclosure (26%) and key services (17%).
• The time taken to resolve defects varied greatly across the sample, with around 38% of buildings taking over 12 months and 25% taking less than 6 months. 
• Only 15% of the buildings with serious defects were reported to NSW Fair Trading;
• The average cost of remediation was over $300,000 (including rectification work, legal expenses, and other professional services. Owners corporations were not able to recover these costs, which were covered by special levies (34%) or an increased annual budget (29%).

 

The second survey in 2023 found 53% of strata buildings in New South Wales had serious defects, the increase from 39% in 2021 suggesting increased engagement from strata communities [3]. The survey found that defects in newer buildings trending down since 2020, driven by a decrease in buildings with waterproofing serious defects, and consumers were more confident in reporting defects to the regulator. The most common defects were: Waterproofing (42%); Fire safety systems (24%); Building enclosures (19%); Structural issues (15%); and Key services, such as lifts and plumbing (14%).

 

 

Figure 1. NSW Defects survey

 

Source

 

In his Foreword to the 2023 survey Building Commissioner David Chandler [4] said: 

Since the commencement of the NSW Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 developers and builders associated with the construction of apartment buildings with serious defects are increasingly held accountable to fix them. As of 1 November 2023, 465 RAB-Act-related audits have been conducted involving more than 29,000 apartments. Development financiers are now paying attention to how they can lower these risks.

 

We are also seeing the positive impacts of the Design and Building Practitioners Act 2020. Since the DBP Act commenced in July 2021, 94 DBP Act audits have been conducted, involving over 10,000 apartments. Across NSW, apartments are now commencing with a much higher resolution of design before construction starts on site. This shift of approach is being reported by builders as leading to less rework, less waste and improved construction times. On-site we are observing far greater awareness of what compliant construction work looks like.

 

Conclusion

 

The scale of the problems of building defects in new apartment buildings built after 2015 required a new regulatory approach, and the Construct NSW reform strategy was the result. Following the recommendations of the 2018 Building Confidence report on non-compliance with the BCA, building failures and defects, the NSW Office of the Building Commissioner was established in 2019 and David Chandler appointed Commissioner. In 2020 the Design and Building Practitioner Act and the Residential Apartment Building Act came into effect. The goal of the NSW reform strategy was to restore confidence in newly built apartment buildings. 

 

The issues addressed by the regulatory reforms in NSW were accountability for the quality of work done, and access to data and transparency about a building’s quality or lack of it. Under the 2020 legislation there are two key requirements:

1. Designers must design properties in compliance with the BCA; and 
2. Construction workers must build properties according to those designs and must build in compliance with the BCA.

To implement the strategy and enforce the legislation the OBC could inspect plans, visit sites, and stop work to prevent defects, and in David Chandler had a highly energetic and effective Building Commissioner. In 2023 the Building Commission NSW bought together the OBC and NSW Fair Trading building functions into a single agency employing over 400 people, focused on compliance of residential buildings.

 

Firms and their employees affected by the DBP Act have had to incorporate its requirement for registration into their business plans to operate in NSW. For many this is not onerous, but for some it is challenging. Similarly, getting an iCIRT rating is difficult for firms with a poor track record, but is an opportunity for good firms to establish themselves as trusted and trustworthy, and for their relationships with suppliers, consumers, insurers and financiers to benefit from being highly rated.

 

The iCIRT ratings scheme for constructors and developers identifies a ‘trustworthy building’ that is fit for purpose, resilient and measurably less risky for the owners, financiers and insurers. With the introduction of the iCIRT ratings scheme and Decennial Liability Insurance, NSW became a leader in increasing the accountability of developers and contractors. Although there are some similarities with insurance-based systems for regulating construction such as the Miller Act in the U.S. and the French system, the scope of the RAB and DBP Acts is wider and those other systems do not include the same inspection powers. 

 

The NSW Government’s Construct NSW strategy was a response to repeated failures in design, construction and certification of buildings. The objective of the NSW strategy was to restore public confidence in new buildings after high profile building failures and widespread defects, with the associated financial burden and misery for owners of affected apartments. This was a multi-pronged strategy based on a Building Commission with new powers for increased inspection of designs and building work, data driven audits of companies and projects, registration and education of practitioners, a ratings scheme for companies, and introduction of ten year defect insurance. This comprehensive strategy has placed NSW firmly at the forefront of construction industry reform in Australia. 

                                                                        *

 

 

[1] Class 2 buildings are multi-storey, multi-unit apartment buildings or mixed-use buildings with shops and apartments. 

 

[2] The problem of flammable cladding in Australia was covered in a previous post, on both the extent of the problem and the differences between the states in their response. 

 

[3] The time and cost of remedial work on defects has increased under the DBP Act because some work that previously was done after agreement between an Owners Corporation and contractor now requires a Development Application. 

 

[4] David Chandler’s term as Building Commissioner finished in mid-2024, and in October James Sherrard became the new Commissioner. While the Berejiklian Government gets the credit for establishing the Office of the Building Commissioner and passing the enabling legislation, Chandler was responsible for the success of the reform strategy. 

The HomeBuilder Program and Australian Housing

 State and federal governments criticised in COVID inquiry report 

 

The release of the COVID 19 Response Inquiry Report on October 28^th included a section on the HomeBuilder program. This was the third report on HomeBuilder, following a KPMG report on the National Partnership Agreement in 2022 and an AHURI report on Responding to the Pandemic in 2020. There was also a review by PWC for Treasury in 2020. 

 

A book published in 1979 called The Construction Industry: Balance Wheel of the Economy argued counter-cyclical economic policy increased construction during recessions, through expenditure on public projects and the effect on residential building of lower interest rates. This has often been the case, in Australia the Rudd Government increased public expenditure on construction after the 2008 financial crisis and the Reserve Bank lowered interest rates to boost residential work after the mining boom ended in 2014. 

 

From this perspective, HomeBuilder was a conventional policy, introduced to counter the recessionary effects of the COVID-19 pandemic. In 2020 economic activity was decreasing and there were estimates of potential GDP losses of up to 20%. In a 2022 speech the Treasury Secretary Steven Kennedy said: ‘The pandemic was unlike any other downturn in recent history and precipitated the most severe economic downturn since the Great Depression. It was a health crisis before it became an economic crisis. Public health restrictions and cautious behaviour by people who didn’t want to catch the virus severely disrupted daily life and led to a sharp decline in output.’ 

 

Total Australian Government spending on economic support measures was $314 billion, or 15.2% of GDP. In that context, HomeBuilder was a minor program compared to the tens of billions spent on JobKeeper and other transfer payments. However, those were programs administered by the Australian Tax office for a large proportion of the population, whereas HomeBuilder was a targeted program administered by the states and territories with strict eligibility requirements. 

 

This post first outlines the program, followed by the relevant section of the Inquiry report, and the review of the National Partnership Agreement. It assesses the effectiveness and consequences of HomeBuilder. How accurate were the forecasts of expenditure on the program? What were the goals of the program and were they achieved? What were the outcomes? Is it an example of good policy, or of poor policy-making that did not consider industry characteristics and capacity? 

 

Outline of the HomeBuilder Program 

 

The program was introduced in mid-2020 to support residential construction by providing a grant of $25,000. Applicants had to have signed contracts between 4 June 2020 and 31 December 2020 to purchase a house and land package, build a new home, do a substantial rebuild or renovation of an owner-occupied property, or purchase an off-plan apartment or townhouse. Construction had to have commenced within three months of the contract date. On 29 November the program was extended to 31 March 2021, with the grant reduced to $15,000 and the commencement time increased to six months. In April 2021 the construction commencement time was increased to 18 months. 

 

There was an eligibility income cap of $125,000 for an individual or $200,000 for a couple, based on 2018-19 or later taxable income (the lack of clarity here became a source of confusion and an issue for the states and territories). There was also a cap on the value of new builds that differed between states, and on the value of renovations. However, the grant amount was the same everywhere for everyone, and the program itself was uncapped. 

 

The government underestimated take-up of the program. It was forecast to support 27,132 applications totalling $680 million, with the extension expected to add 15,000 applications at an estimated cost of $241 million. However, by June 2024 113,156 applications had been approved and $2.6 billion had been paid. Although applications closed in April 2021, there may be further costs as applicants have until 30 June 2025 to submit documents supporting their applications.

 

HomeBuilder was implemented through a National Partnership Agreement with the state and territory governments, which made the states responsible for administering the program. It was designed to complement existing state and territory First Home Owner Grants Programs, then all states except South Australia gave stamp duty concessions for new builds (whose value varied greatly but might be up to $40,000 depending on the house and location), and Western Australia, Tasmania and the Northern Territory added an extra ‘home building boost’. Combining HomeBuilder with the state and territory schemes, first home buyers in Western Australia and the Northern Territory could access $55,000 in grants, in Queensland, Victoria and Tasmania up to $45,000 in grants, and in NSW $35,000. The federal and state programs are in Table 1.

 

 

Source: AHURI 2020: 15. Responding to the Pandemic. The table does not include the value of stamp duty exemptions.

 

 

The COVID Inquiry Report

 

The report included a couple of interesting data points on construction during COVID. It noted industries with a large proportion of small businesses received most of the JobKeeper and Cash Flow Boost payments, including construction, which received $2.5 billion. These payments were made to employers. There was also a graph of changes to revenue for firms between 2019 and 2020 (p. 582), which showed 45% of construction firms increased their revenue, 30% had decreased revenue by up to 50%, and there were 15% of firms with revenue decreasing by more than 50%. 

 

The report focused on the inflationary effects of HomeBuilder. Between September 2021 and September 2022 the contribution of housing to quarterly inflation was between 20% and 40% of the total change in the consumer price index (CPI). The fiscal stimulus from government grants combined with existing labour shortages, exacerbated by border closures, and pandemic related supply chain disruptions that increased material costs. As a result, the cost of building a house increased by around 30% during COVID. 

 

Table 2. Construction contribution to quarterly inflation (% change)

                                    Sep 21  Dec 21  Mar 22  Jun 22   Sep 22

Construction                  0.35        0.37        0.56        0.52        0.67

Total CPI                       0.8           1.3           2.1         1.8         1.8

Source: COVID 19 Response Inquiry Report 2024: 59. From ABS data. 

 

The inquiry report found the program inappropriate and inflationary: ‘the HomeBuilder program created excess demand in an industry facing supply constraints. This has been a significant contributor to inflation coming out of the pandemic, and the program’s focus on renovations rather than new builds added to the general housing shortages. These types of demand-side stimulus measures are largely not appropriate in pandemics where industries are facing supply constraints’ (p. 549). 

 

A counter-cyclical increase of government expenditure in a recession is a common use of fiscal policy, and the construction industry is often targeted because it is both an employer of many workers and a major source of demand for domestic suppliers. The inquiry report concluded: ‘There are clear indications that the infrastructure measures taken – in particular, HomeBuilder – overheated the industry and contributed to inflation in the post-pandemic era. The program was designed explicitly to stimulate aggregate demand and support the residential construction sector. It acted to stimulate consumption expenditure and lowered the significant household savings built up during the pandemic. However, the measure failed to appropriately take into account the supply-side effects of the pandemic’ (p. 593) 

 

The section of the Inquiry report on HomeBuilder is unsatisfactory because, apart from the 113,156 applications received and the table on CPI, there is no other data. A review of the program that does not include houses commenced and completed, or people employed, is not comprehensive and does not allow conclusions to be drawn on the effectiveness of the program. That data is provided below when assessing the program. 

 

In an immediate response to the report ‘Master Builders Australia CEO Denita Wawn said HomeBuilder was the right policy for the time and should not become the scapegoat for systemic housing challenges.’ At the time of writing no other industry association has publicly commented on the report. 

 

Infrastructure Spending

 

As well as HomeBuilder, Australian governments significantly increased spending on infrastructure during COVID. The Inquiry report found by May 2021 the Commonwealth Government had committed $14 billion to infrastructure projects, and the 2021–22 Budget included an additional $15.2 billion over 10 years for road, rail and community infrastructure. Also in 2021, the New South Wales Government committed to $100 billion in infrastructure work, and the Queensland Government announced projects worth $52 billion. In both cases the projects were expected to be completed over four years. 

 

Figure 1. Engineering construction

Source: ABS 8762. Work commenced by the private sector. 

 

As Figure 1 shows, the public infrastructure projects announced in 2021 were commencing in 2022, and in the five quarters from March 2022 to March 2023 over $57 billion of public engineering work commenced. This was an unprecedented amount, for comparison, in the 2020-21 financial year public engineering work commenced was $21 billion. In 2021 private engineering commencements also began increasing, and both public and private commencements then peaked at the same time in December 2022.

 

 

HomeBuilder National Partnership Agreement Review: Stakeholder Consultation Report

 

The 2022 review of the National Partnership Agreement (NPA) by KPMG found state and territory governments were not consulted on the design or implementation of the HomeBuilder program. The first they knew about the program was when it was publicly announced. This is somewhat ironic, given first the objective of the NPA was to create ‘a framework for the parties to work cooperatively, to provide financial assistance to eligible owner-occupiers to increase residential building and maintain jobs. No administrative funding was provided by the Commonwealth Government for establishing, running and reporting on HomeBuilder, despite the size of the program. 

 

The states and territories were responsible for administering the program, checking eligibility, and compliance and auditing. The review found ‘This created significant implementation challenges for these jurisdictions.’ There were also significant costs associated with assessing eligibility and the principal place of residence of applicants. The report also found insufficient clarity and guidance on the income caps, in the definition of substantial renovation, on citizenship requirements, and for cases where replacement contracts were required. Treasury ‘erroneously assumed’ existing First Home Owner Grant portals could be used. 

 

The review commented on the inflationary effect: ‘It could be said that the HomeBuilder did partially contribute to the constraints in supply of labour, materials and land that resulted from this industry overheating. However, it is critical to note that this would have been just one factor. Broader supply chain issues because of the COVID-19 pandemic were another, and much more impactful, factor.’ (p. 15).

 

Issues raised in the consultations with the states and territories were:

·       Did the eligibility criteria favour middle to high income earners?

·       Was offering the same amount for new build and renovations a fair approach?

·       Did the NPA consider state and territory ‘operating environments and industry contexts’ such as internal migration and their supply and demand balance?

·       Did HomeBuilder only benefit a small number of builders?

 

 

What Were the Outcomes of the Program?

 

The purpose of HomeBuilder was to increase residential building and maintain jobs by providing financial assistance to eligible owner-occupiers. Both of those objectives were achieved. The total number of people employed in construction in August 2020 was 1,145,814, a year later in August 2021 it had fallen to 1,114,644, but by August 2022 it was 1,251,601. Construction employment continued increasing through 2023 and 2024, reaching a record high of 1,358,239 in May 2024. 

 

As Figure 2 shows, residential commencements increased rapidly after the program started in mid-2020. The 42,475 houses commenced in the June quarter 2021 was an all-time record, well above the quarterly commencements of around 30,000 during the housing boom between 2015 and 2018. The increase for apartments was not as dramatic, although still substantial, rising from 15,070 in the September quarter 2020 to 22,913 in the June quarter 2021. 

 

Figure 2. Number of dwellings commenced

Source: ABS 8752

 

The combination of HomeBuilder induced demand with COVID supply chain disruptions had three effects on residential construction. First was the increase in completion times for houses. As Figure 3 shows, the industry usually delivers between 25,000 and 30,000 houses a quarter, less in the March quarter because of the January holiday, with most houses completed within 12 months. It took three years, until the December quarter 2023, to complete the extra 100,000 houses commenced in 2020 and 2021 during HomeBuilder [1]. There was less effect on apartment completions because the number of commencements was well below past record levels, so the volume of work was within industry capacity not above it. 

 

Figure 3. Number of dwellings commenced and completed

Source: ABS 8752

 

Second was the increase in the cost of inputs. Some of the materials and component price increases were due to global factors, but there were also significant increases in domestic prices and labour costs. As Figure 4 shows, the ABS input price index increased from 120 in December 2020 to 154 in December 2022.

 

Figure 4. Housing costs 

Source: ABS 6427

 

In the 12 months after the surge in commencements due to HomeBuilder, between the December quarter 2021 and December 2022, the price of basic inputs such as timber, plywood, glass, cement and steel all increased by around 15%. Some of the increase was due to higher energy and freight costs, and the other materials category was affected by plaster products because of a global price increase for gypsum. However, the main driver of these price increases was the high level of demand created by HomeBuilder and also, for concrete and steel, infrastructure projects. 

 

Figure 5. Construction input price changes to December quarter 2022

Source: ABS 6427

 

The increase in house building costs differed across the states. In the Reserve Bank’s November 2024 Statement on Monetary Policy the RBA commented: ‘Labour costs continue to contribute to ongoing cost growth, partly driven by the large pipeline of construction work and ongoing labour shortages for certain trades. Outcomes have varied across capital cities. Year-ended new dwelling cost inflation has returned to around its pre-pandemic average in Sydney, Brisbane and Hobart. By contrast, new dwelling cost inflation in Perth has increased further in year-ended terms, consistent with high demand for new homes and increases in labour costs’. The accompanying graph highlights how rapid and extreme the pandemic cost increases were.

 

Figure 6. Capital city cost inflation

Source: Reserve Bank of Australia, Statement on Monetary Policy, November 2024. 

 

 

Third was the increase in insolvencies between 2022 and 2024, as many builders on fixed price contracts entered into during HomeBuilder were unable to continue after cost inflation led to losses on those projects. Because of measures put in place to support industry during the COVID pandemic there were fewer insolvencies than usual in 2021-22, with a total of 1,639 construction businesses going into administration. The numbers for 2023 and 2024 show a substantial increase in total insolvencies from 2,812 to 3,882.

 

Figure 7. Construction insolvencies

Source: Australian Securities and Investment Commission

 

 Conclusion

 

A counter-cyclical increase in government construction expenditure is a common use of fiscal policy. However, the COVID Inquiry report concluded: ‘There are clear indications that the infrastructure measures taken – in particular, HomeBuilder – overheated the industry and contributed to inflation in the post-pandemic era.’

 

The purpose of HomeBuilder was to increase residential building and maintain employment, and it succeeded in both of those. There was a small decrease in total construction employment in 2021 of around 30,000, followed by a steady increase to a record 1,358,239 people in 2024. The program quickly increased housing commencements to record levels, but completion times increased and it took three years to complete the extra 100,000 houses commenced in 2020 and 2021.

 

The size of the program was uncapped and Treasury significantly underestimated the number of applications [2]. Their forecast for the cost of the program was $680 million, and the extension $241 million but, instead of $921 million, by June 2024 $2.6 billion had been paid. Although HomeBuilder was a minor program compared to the tens of billions spent on transfers through the Australian Tax office, it was targeted at a specific industry and administered by the states and territories. 

 

Over time the effects of the sudden increase in commencements financed by HomeBuilder became less positive. The COVID Inquiry report focused on the inflationary effect of the rapid increase in demand on the cost of housing, which accounted for up to 50% of CPI increases in 2021-22. The report concluded the demand side stimulus was not appropriate and ignored the supply side effects. The increase in residential commencements was not only due to HomeBuilder, which combined with first home owner grants, stamp duty exemptions, and other incentives given by state governments, all of which added to the excessive level of demand. 

 

Likewise, the increase in materials and component prices was not only due to HomeBuilder. Both the Commonwealth and the states also increased expenditure on infrastructure during COVID, which added to the inflationary effects. In the five quarters from March 2022 to March 2023 over $57 billion of public engineering work commenced, a record amount, and both public and private engineering construction commencements peaked at the same time in December 2022. 

 

There was a notable failure in policy making in 2020, governments and their advisors should have decided to target either residential building or engineering construction for stimulus. To simultaneously do both showed a poor understanding of construction industry characteristics and capacity, and ignored the obvious domestic and international supply side constraints during the pandemic. Also, governments would have been aware of rising private sector engineering expenditure when increasing their own spending. There is no evidence of industry being consulted or asked for advice at any point while these decisions were being made. 

 

The consequences of these poor policy decisions by state and federal governments have now become apparent. Over 8,000 construction businesses have become insolvent since 2021, many because of losses on fixed price contracts entered into under HomeBuilder, affecting thousands more customers, subcontractors and suppliers. The cost of inputs to housing construction have increased by around 30% since 2020, increasing house prices and making new houses unaffordable for many first home buyers. Further, the build cost of new apartments is now above the price of existing stock, so the apartment market is broken. Infrastructure projects have had cost increases and delivery delayed. 

 

There is a long tradition of increasing government expenditure on construction to counter economic downturns, however HomeBuilder was not good policy. Rather, when combined with the increase in public infrastructure spending, it is an example of reactive over-reach and poorly considered policy-making. Over the last two years inflation, and therefore interest rates, would have been substantially lower without HomeBuilder, as would house prices. That may be hindsight, and with COVID the circumstances were extreme. Nevertheless, the program did not take into account the characteristics and capacity of the construction industry, and at no point attempted to address the important supply side issues the industry had to deal with. Unfortunately, the implementation and size of the program demonstrated little understanding of the industry by governments and their advisors.

 

                                                                      *

 

[1] In the Australian Financial Review (1.11.2024)  the Stockland CEO Tarun Gupta was quoted: ‘pre-COVID it took his company 16 weeks to build a home, it doubled to 32 weeks in the pandemic, and is back to 20 to 22 weeks. He dubs it a new “resistance level”. Likewise, he says civil works for a 300- or 500-lot precinct used to take 26 weeks, blew out to 42 weeks in Victoria (the worst state at the time) and is back to 32 to 34 weeks.’

 

[2] None of the reviews of HomeBuilder looked at the Treasury forecasts or asked why they were so far off the mark.