As soaring construction costs and builder bankruptcies spread across Australia, a flood of abandoned homes is hitting the real estate market.
Would-be homeowners have been left with half-built properties and shattered dreams as they’re forced to sell their homes after their builder went bust or they encounter unexpected extra costs.
These incomplete properties, which range from newly built shells to renovations halted halfway through, are the fallout of an industry-wide crisis that has seen over 2,800 construction company insolvencies in the 2023-24 financial year.
Driven by mounting material costs, labour shortages, and industry-wide financial strain, major construction firms such as Porter Davis Homes, Probuild, and PPS have all been forced to close their doors mid-project, leaving the customers without a roof over their heads.
In some cases, homeowners are losing their deposits and the possibility of finishing the homes, as they’re left with no choice but to sell the property incomplete and often at a loss.
This spate in half-built listings has opened the door to savvy investors and bullish builders to snag a project with significant capital growth potential as they complete, fix, and flip properties that can go on to sell for twice the purchase price once they are complete.
But despite lacking roofs, doors, walls and floors, these half-builds are still not cheap, such as a dual key duplex at 8 Burradoo Street, Caringbah South in NSW, which costs $3.7 million.
Or this rebuild-renovation at 23 Judd Parade, Cheltenham, in Victoria, is currently on sale for $1.1 million.
However, there are some lower-budget bargains to be had, too, with this incomplete property in Wandi, WA, recently accepting an offer of just over $500,000.
Meanwhile, this 7-bedroom mansion (or at least a shell of one) at 33 Spruce Street Loganlea went for just $486,000 at auction in July.
Property gurus warn novice investors
While buying an incomplete project might seem like a good opportunity for those willing to take a risk, Queensland-based property expert and @Realty agent Joel Lo cautions that purchasing a half-finished house can be risky.
“One of the primary concerns is the potential for unforeseen issues and additional costs,” Mr. Lo told Build-it.
“Without a clear understanding of the project’s status and the quality of work already completed, buyers may encounter hidden structural, electrical, or plumbing problems that could require significant time and money to rectify.”
Mr Lo also warns that financing for half-built homes can be challenging to secure, leaving buyers potentially struggling to fund both the purchase and the remaining construction costs.
He says, thorough inspections and consultations with experienced professionals are essential for any prospective buyer assessing an unfinished property, or they will risk ending up in a similar position as the original vendor.
“If the project stalls or encounters unexpected setbacks, buyers may find themselves responsible for covering additional costs out of pocket or facing delays in completing the construction,” he said.
“Conducting thorough due diligence, exploring alternative financing options, and having a contingency plan are essential strategies for mitigating these risks and ensuring a successful investment in a half-finished house project.”
Deepening crisis in construction
Despite being good news for construction skilled investors, this increase in incomplete properties coming to market has fueled concerns about the stability of the home construction sector.
Rising costs for materials and labour, paired with rigid fixed-price contracts, have left many builders unable to absorb financial shocks, which has led to both firms and homeowners bearing the brunt.
According to the Australian Bureau of Statistics, the cost of home-building materials has risen by 34.5 per cent since 2019, and skilled trades have become 30.4 per cent more expensive. Coupled with low-profit margins, these costs are unsustainable for many firms operating with little buffer to accommodate price hikes.
Many companies have turned to using consumer deposits from new projects to complete prior jobs—creating a cycle that leaves more and more homeowners stranded when these firms inevitably fail.
It’s a scenario Australia’s housing sector had fair warning of, with a 2022 Reserve Bank of Australia report identifying construction firm collapses as a potential systemic issue, predicting that if insolvencies were left unaddressed, they would intensify and ripple across the industry.
UNSW researcher Dr Bradley Hastings states that Australia’s construction sector is buckling under exceptional pressure with more businesses at risk of going bust.
“At a time of unprecedented need to build, construction companies are collapsing like houses of cards, leaving consumers with lost deposits and half-finished homes,” Dr. Hastings said.
“Going ‘under the hood,’ Australia’s homebuilding industry is characterised by low-profit margins and fixed-price contracts, meaning that there is little headroom or mechanism for builders to absorb pressures such as rises in material costs and labour shortages.”
“This means that many homebuilders have been operating at negative cashflows, where suppliers don’t get paid, and projects are left unfinished.”
A need for homeowner protection reform
The growing trend of abandoned builds highlights a glaring gap in consumer protections.
Unlike deposits in other sectors, construction deposits lack safeguards to ensure funds are used solely for the intended project.
As a result, many builders facing cash flow issues use new deposits to finish older projects, creating a Ponzi-like cycle that puts more consumers at risk.
Industry experts are now calling for regulations requiring project accounts, where consumer funds are held securely and drawn down only as work is completed.
“When a residential homebuilder goes bust, consumers become unsecured creditors and are at the bottom of the food chain after a lengthy insolvency process,” Dr Hastings said.
“For many consumers, the great Australian dream of building or renovating a home has become a nightmare. News is replete with stories of lost consumer deposits and half-finished homes.”
Dr Hastings says reform is urgently needed to restore confidence in the home construction sector and ensure home buyers are properly protected.
“Financial services firms already provide a template for ring-fencing consumer funds and ensuring that money is spent for its intended purpose.”
“Extending this protection to the residential construction sector would require setting up project accounts, where consumer funds reside until they are drawn down by builders and subcontractors and the work is completed to standard.”
“In the event that the builder goes bust, this money remains in place to pay subcontractors and continue the build.”
