Will the Minimum Financial Requirements Prevent Builder Insolvencies?

What Victoria’s new financial rules could mean for builders

The home building industry is going to have to endure more regulatory disruption next year. The Victorian government is introducing a new version of domestic building insurance, and this will be accompanied by so-called minimum financial requirements to be a registered builder.

The introduction of the minimum financial requirements has the potential to create significant challenges for home builders. A new system for limiting the amount of work a home builder can undertake at any time (currently eligibility limits and category limits) will be gradually implemented. This will be stressful for home builders, as they have in recent years had to deal with significant cost increases without corresponding limit increases.

A great irony of the current Victorian reforms is that it’s not uncommon for the government to raise the liquidation of Porter Davis Homes as a reason to introduce these reforms. This is ironic because Porter Davis Homes not only operated in Victoria but also in Queensland. They were building about 200 homes in Queensland when it went into liquidation. It was almost one of the top 20 home builders in that market.

Porter Davis Homes was subject to minimum financial requirements in Queensland. It would have been subject to significant scrutiny by the Queensland regulator as a relatively large home builder. Despite this, it still went into liquidation and adversely affected hundreds of Queenslanders. The minimum financial requirements didn’t work in that case. Both the Victorian and Queensland regulators failed to prevent insolvency and then liquidation.

It’s unfair to rely on a sample of one builder. Instead, we need to look at the incidence of construction industry insolvency in both Queensland and the rest of the country. Once again, however, the evidence is not helpful for supporters of minimum financial requirements. There’s no evidence that the introduction of minimum financial requirements has led to a decrease in home builder insolvencies in Queensland compared to other parts of the country. Instead, home builder insolvency in Queensland has increased in recent years, as it has elsewhere.

It seems unlikely that the stress of introducing a minimum financial requirements system for home builders is going to have an impact on preventing insolvencies. It will be necessary to look elsewhere for benefits from the introduction of such a system.

One feature of minimum financial requirements is that it introduces more transparency into the availability to home builders of domestic building insurance, and perhaps this will be the benefit that makes some of the pain to come worthwhile.

HIA members are welcome to contact us on 1300 650 620 for further advice.