Who benefits from the Government stimulus package.

The COVID-19 pandemic has caused major widespread economic costs, significantly impacting economies across the world. In response, many Governments’ released stimulus packages to keep their economies alive. The Australian Government introduced it’s “HOMEBUILDER PROGRAM “.

Who remembers this time last year the Australian PM introducing this package, and being told to get off lawn!

12 months on we hope the blokes lawn has recovered. Let’s take a look and see how , and who this has helped so far.

The graph below depicts Government COVID spending as a percentage of Gross Domestic Product (GDP) for a selection of countries, where GDP, simply put, represents the income a country generates through sales of good and services.

Government Covid Spending

The Australian Federal Government has focused a lot of its COVID-19 stimulus spending on major transport infrastructure projects, including:

  • $2.6 Billion for the Darlington to Anzac Highway in South Australia
  • $2.0 Billion for a proposed new intermodal freight terminal in Melbourne
  • $2.0 Billion for the Great Western Highway Upgrade in NSW

These are just a few of the mega projects that the Federal Government announced in the budget earlier this year, to support employment in a post-pandemic economy.

I totally understand the theory of investing in infrastructure and public investment acting as a stimulus to get the economy moving, assisting with future growth industries and having an immediate impact upon employment and production, however I find myself asking the following question.

Prior to the Pandemic wasn’t the engineering and construction industry already over stretched, or at least pushing its limits, as it was already struggling to find enough skilled labour to get projects completed on time. Before Covid, the industry was relying on sourcing skilled labour from abroad to fill the shortfall. But now the international borders are closed and the number of projects have increased, so how does this play out when it comes to sourcing labour?

Whilst I have highlighted investment in infrastructure, and just a few of the proposed huge projects, it is my opinion that this filters all the way down to the housing industry.

Let me explain myself.

In the 3rd financial quarter (referred to as Q3) of 2020, the Federal Government released stimulus packages making it attractive to build a new home or renovate. State Governments supported this with state funded stimulus packages, many targeted at first home buyers. It all sounded like a fantastic opportunity not to be missed for the first home buyer – opportunity was knocking at the door, the government was helping you get into your house faster by reducing the amount of deposit you needed to save.

My question is, will they really leave the first home buyer better off?

Here’s what I see happening. Government incentives released a “HOMEBUILDER PROGRAM “in Q3 2020 effectively providing a $25,000 grant for those eligible. I’m going to use Perth as my example. Here the State Government had a WA Building Bonus package of $20,000. This was aimed at the new home buyer, and again eligibility criteria had to be met. On top of that, the first homeowners grant in WA is $10,000, again for those that qualify.

Whose attention isn’t grabbed at the opportunity of receiving a $55,000 head start into the journey of home ownership.  FOMO – the Fear Of Missing Out is strong.

Builders in Perth signed record numbers of contracts with new home buyers in 2020. The way the home building construction industry works typically is that tradies are all subcontractors and are paid on an agreed rate based on a fixed price. Builders then have their equations where they add on their management fee, margins etc, and the equation produces a bottom line which is used to formulate a contract, that is then agreed with the new homeowner, and it’s all pretty exciting times. That’s a basic overview of how the home builder’s business plan works.

Well enter 2021, and what with record numbers of contracts signed, and borders closed, demand for tradies soon outstripped supply, leading to them increasing their fixed prices. A few dollars here or there would normally be swallowed by the builder to avoid them the hassle of having to contact the new homeowner to discuss price increases.  Unfortunately, here we aren’t just talking a few dollars here or there.  In fact, for some trades, such as bricklayers, their prices have almost doubled.

That’s just labour. There’s also supply chain issues. Getting a container out of China 18 months ago would have cost you about $2,000. Well, China’s ports have been closed with the latest Delta Strain of the virus, and there are no containers. If you can source a container, what cost you $2,000, now costs closer to $20,000 – and that’s without filling it.

Ouch! how does this all work? and what does this all mean for our friend the new home buyer, and the builder?

Well, the builder signed a fixed price with the client based on the bricklayers price before the bricklayer increased their price, and before the supply chain became an issue. The builder unfortunately has no choice. They then sit down with the new homeowner, and discuss the contract and have the uncomfortable discussion about where more money is coming from as a result of the cost of construction increasing.

It’s my belief that the increase they are talking about is actually working out greater than the amount of the grant received!

Thus, placing the home buyer in a position where they are worse off.

The people I feel sorry for are new homeowners that were capped out when they entered the contracts, meaning they have no more money available to fund increased costs. If the make or break of entering into a new home contract was relying upon the government grant to cover part of the deposit, and the unplanned costs increased to beyond those budgeted, even with the government grant, well there has to be casualties.

The builder has sat down with the new homeowner and explained why there has been an increase in costs, and somehow those people need to find a way to service the increase, often ending up having to borrow more money and risk living beyond their means – or risk losing their deposit if they can’t cover the extra.

With international borders being closed, there’s no backpackers filling labouring roles, there’s no 457 visa holders as tradesmen coming into the market anytime soon. This situation is here to stay for the foreseeable future.

Twelve months ago, in Perth a new home builder was averaging 18- 25 weeks to completion. Now it’s at least 40 weeks. That’s almost double the time to build. Yes, there is a cost in that as well. The cost of finance, the cost of living somewhere whilst your house is being built. Paying rent, plus a mortgage.

The latest headline in The Western Australian claims that West Australians face up to three years for new homes amid tradie shortage (14 July 2021).  What this means is that many people may be waiting more than two years before the new home build even commences.

Builders aren’t putting up prices to simply fill their pockets. Most builders I know are forced to pass on the costs of this extra time to completion, at zero financial gain to them. In fact, it comes with additional costs for them as well, in terms of extra administration, and the builder that budgeted for a 25 week build in their management plan, has increased expenses, whilst the delays restrict their ability to get new work.

For the new homeowner, their dream – enabled by the government grants, may well become their nightmare.

It will be interesting to see where this ends up, the only certainty I can give is there will be some casualties, and a not a few sleepless nights.

3 Years To Build a House

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.

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