Home builders are discouraged from offering fixed prices on jobs due to escalating prices and critical shortages of materials.
Mortgage brokers are now finding escalation clauses that crop up in contracts to allow material prices to rise; They say banks favor fixed-price builds, so getting a mortgage could be more difficult.
“For me, it’s uncharted territory, I haven’t seen this before,” said Paulette Trotter, who has been in the financial industry for three decades.
The situation is exacerbated by the pandemic choking the supply chain north and south of Auckland, with some builders having to tear down tools.
Mike Blackburn of Canterbury CBS Building Cooperative has learned of the pressures on its more than 600 traditional members.
“I got an email this morning from a builder who said [Monday] in the afternoon, it will be tools for them, they just don’t have the building materials to keep working, “Blackburn said.
Demand was already through the roof as triggered consents fueled construction cost inflation of 4.5 percent annually as of June – before the confinement hit and made things worse.
Blackburn says this presents a “huge challenge” to listing a fixed price, hitherto the standard approach to building new homes.
Stephen Voyle, director of Context Architects, said one approach was to price the initial work, for example, for the foundations, or just for the first half of a project.
“We can’t find anyone to give us a fixed price anymore,” he said in a recent construction webinar.
“The projects last two years and it is simply impossible.”
Master Builders CEO David Kelly warned in the same webinar against “not being convinced” of a fixed price job.
“You don’t know what’s going to happen.
“Customers will want a fixed price, I understand that. Builders like to help people.
“But you have to preserve your margin and be very, very cautious.”
Matthew Hardcastle has 1,200 homes booked to build at Williams Corp, the fifth-largest developer in the country.
Damped by its size and the fact that it is both a developer and a builder, it is still not immune.
“I’ve never seen cost inflation like this,” Hardcastle said.
“We’ve had three price increases on bricks alone this year. It seems like every other day you get a new email about price increases.
“So what’s going to happen is the construction industry will stop fixed price contracts, or make less of them … or ‘I’ll give you a fixed price for labor, but I won’t give you a fixed price. ‘”. about the materials’.
“And then what is going to happen is that the banks will refuse to grant loans to these people.
“And we’re going to see a really interesting kind of dance between financial institutions and the construction industry and customers, about how everything is going to fit together.”
Mortgage broker Bruce Patten helped out with a fixed price contract yesterday; they are still offered, but at the same time you see more escalation clauses.
“More recently it was a case where they hadn’t started construction yet and they already came back and said, ‘the price increase is $ 25,000 over the original purchase price’ on a modest Christchurch property.”
That buyer had a clause that allowed them to withdraw, Patten said.
Blackburn said such escalation clauses are the new option for builders to deal with very thin margins.
Trotter has also encountered a price hike, but without warning.
“I’ve definitely seen some things in the last few months that I’ve never seen before,” he said.
“I’ve seen a couple of cases where clients signed fixed-price contracts last year, and the builders came back saying, ‘It’s changed. You owe me another $ 65,000. ‘
“I ask them to seek legal advice, but there is nothing they can do. They have had to pay the money.”
In one case, the interim costs in the contract complicated matters, but the other was a direct fixed price.
Trotter has a warning for distressed buyers.
“If you have someone who only knows the [lending] criteria, and there are escalation clauses there … I can guarantee that the bank will reject that approval. “
Patten says that what is happening could have a “great impact”.
“Banks generally don’t allow anything more than a fixed price contract to be done, unless you have at least a 35 percent deposit.
“And most people, not just first-time home buyers … are not investing a third of the purchase price.”
Builders expected the building materials choke to continue even after Auckland exited alert level 4. Hardcastle expected some companies to be unable to cope with hiring changes.
“It’s going to add significant complexity that most people won’t be able to deal with,” he said.
“We have record consents at the moment, but I also believe that we are going to have record numbers of projects that will not go ahead.
“I would probably get three phone calls a day from people who were trying to do a development and now they have given up and are trying to sell the land to me.”
The government needed to do more to maintain productivity, while fighting Covid-19, he said.
The construction webinar heard that ways to handle problems include involving a contractor at the beginning of a construction, or fixing what products are specified for their use and the price, outside of the finished drawings.