The state-backed insurance agency that provides cover to home owners if a building company collapses was losing hundreds of millions of dollars even before Porter Davis went bust, because of higher than expected claims last year.
The Victorian Managed Insurance Authority (VMIA) reported a deficit of $249.2 million in the 2021-22 financial year, according to its latest annual report.
The Victorian Managed Insurance Authority recorded a $250 million annual loss before the collapse of Porter Davis last week.Credit: Eamon Gallagher
It also blamed the losses on lower investment returns driven by inflation and the war in Ukraine.
Porter Davis went into liquidation late last month, leaving 1500 unfinished homes in Victoria, after it was unable to find a last-minute buyer or backer to cover a funding shortfall of about $200 million. Industry figures say the collapse of the country’s 12th-largest home builder is the tip of the iceberg and point to the VMIA’s deficit as evidence that builders have been struggling.
The 2020 federal HomeBuilder grant was aimed at boosting the construction industry during the pandemic, but a brief surge in new homes was followed by a slump when the stimulus ended. Builders were also hit with cost pressures linked to soaring prices for raw materials such as wood and cement. In Victoria, builders are not allowed to adjust a contract when building costs increase, meaning many cannot recoup their losses from customers.
On top of rising industry costs, record interest rate rises over the past year have dented consumer confidence, with fewer people buying homes.
The VMIA is working with liquidators Grant Thorton to determine how many Porter Davis projects have domestic building insurance, which is compulsory for building works worth more than $16,000. The agency faces a bill of up to $80 million, more than its entire payout in 2021-22.
Grant Thorton revealed this week some customers could have lost their entire deposits because Porter Davis did not take out insurance for new builds until planning permits were obtained – sometimes weeks or months after customers had signed contracts.
Sienna Homes director Vaughan McDonald said the VMIA was underwritten by the state government so he was confident home owners would be protected. But the multimillion-dollar deficit was likely to lead to higher premiums for builders, who would be forced to pass it on to consumers.
He said as much as half the building sector could collapse if things deteriorated further, and called for the new National Construction Code, which takes effect in Victoria in October, to be delayed.
McDonald said the code, which will require new homes to have at least a seven-star energy rating, could add up to $50,000 to the cost of a build and further dent consumer confidence. He said the industry would also struggle to meet demand given the lack of qualified tradespeople.
“How can we incentivise people to go into trades training and stay with businesses?” McDonald said. “First-year apprentices are getting dragged out of the sector to go to the government’s Big Build [infrastructure project]. It’s sucking up resources from our industry and making things even more difficult.”
The VMIA also flagged a significant drop in its performance from insurance operations, which measures how well it is doing. The authority expected to achieve a surplus of $62.6 million in 2021-22, according to the annual report, but instead recorded a loss of $111.1 million because of the number and value of insurance claims.
A Victorian government spokeswoman said the insurance agency had received more than 600 claims from Porter Davis customers since the company’s collapse. All of those would be paid out, she said.
“Recent events in the construction sector highlight the importance of domestic building insurance for customers,” the spokeswoman said.
Jess Wilson, the opposition’s spokeswoman for home ownership and housing affordability, said the average time for standard VMIA claims to be processed was three years. She said the government must ensure Porter Davis customers are paid in full and quickly.
“The dire financial position of the VMIA is another example of a government that can’t manage money,” Wilson said. “The last thing home buyers caught up in builder collapses need are questions about the state insurer’s financial ability to pay out claims to ensure homes can be completed.”
The VMIA was contacted for comment.
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