“Domino effect” to drive tsunami of home builder collapses

I noted earlier this week how Privium, Condev, ABG Group and Probuild are among the major Australian construction firms that have gone into liquidation over recent months, alongside many smaller builders.

An industry insider also warned that the collapses are only the “tip of the iceberg”, given factors such as rising labour and material costs are squeezing margins, particularly where customers have signed fixed-price contracts.

Now construction insolvency expert Andrew Spring – partner at Jirsch Sutherland – has warned of more pain for the residential construction industry, with rising interest rates to add to an already “nightmarish stacked deck of rising material costs, COVID-19 shutdowns, supply problems and labour shortages”:

“The concern is that interest rate rises bring is that it softens the property boom, or eradicates it to a point where the purchaser is worried that the value of their property is not continuing to rise, and in fact may well decline,” Spring said.

“Prices may start to falter even more quickly”.

“For developments in the process of construction at the moment, if they’ve got pre-sales in place, what’s the risk now of those pre-sales actually completing?”…

Giants like Probuild and Condev have already folded, while Privium Group, Dyldam Developments, Hotondo Homes franchise Tasmanian Constructions, ABD Group, BA Murphy, Pindan and Inside Out Construction have gone bust in recent months…

“It’s inevitable there’s going to be a lot more insolvency in the construction industry,” Spring said, which will inflict a “domino effect” on builders, subcontractors and trades.

The irony of this is that the tsunami of home builder collapses has occurred against the backdrop of near record construction levels, thanks to the HomeBuilder stimulus:

Australian dwelling construction

Dwelling construction levels boomed on the back of HomeBuilder.

However, soaring materials and labour costs, combined with the proliferation of fixed priced contracts, has meant that most builders have been unable to make a profit, despite being busier than ever. As such, the Master Builders Association claims 98% of its members are having their profits squeezed or are losing money.

Basically, HomeBuilder has delivered a profitless boom for Australia’s residential construction industry.

Unconventional Economist

Comments

    • Are you suggesting the party of pink batts would not have rolled out a similar package…? This one fits squarely in the bi-partisan pork category.

      • But yes, at least the pink batts achieved some environmental benefits despite the inability of the private sector to maintain installation safety standards as they tried to rip it off.

          • Exactly what I said – the poor standard of the private sector installers killed their own workers.

          • fitzroyMEMBER

            KEVIN FULLER: We’ve had junior politicians apologise and the Senate inquiry apologised, but the then Prime Minister couldn’t remember our names and has never apologised to our face. Just we get that everybody’s apologised, but they don’t apologise to the appropriate people, and we’re not necessarily talking only us. It’s the Australian public. The program wasted four lives – don’t forget the one in NSW. There were numerous people were seriously injured or nearly killed. There were too many fires in houses and a lot of people were scared of their home simply because of the foil insulation in the house until it got fixed. So, everyone really talks about the deaths; they don’t talk about the whole program which was poorly done, the way it was rushed, the way that things were done on the fly. Nothing was managed well. If it was us running our own business or doing things, then we would have been held more accountable than whether it’s the politicians or the public servants. The public servants and politicians in both federal and state didn’t communicate together, didn’t work together and all hid from the problem.

            LEIGH SALES: Mrs Fuller, do you have anything to add to that?

            CHRISTINE FULLER: That’s pretty – that’s it. That’s my feelings also.

            LEIGH SALES: Mr Fuller referred there to the then Prime Minister, who was Kevin Rudd. Mrs Fuller, is there anything that you would like at this stage from Kevin Rudd?

            CHRISTINE FULLER: I’d like for him to disappear.
            https://www.abc.net.au/7.30/parents-say-pm-didnt-apologise-for-their-sons/4800578

  1. UpperWestsideMEMBER

    “The irony of this is that the tsunami of home builder collapses has occurred against the backdrop of near record construction levels”
    This is sort-of business 101, fast growth of a business in a fast growth sector often leads to bankruptcy. This is most often due to a liquidity crunch (costs growing faster than received income, blowout of the inventory pipeline etc) but it also happens when staff and input costs blowout. Silicon Valley is fully of MBA case study examples of this over the years. Their solution is to raise insane amounts of pseudo equity on zero income hoping that the company gets past the super growth phase, negative economics phase without blowing up. Liquidation preference convertibles help the investors ameliorate the risk somewhat. .

  2. Low margin businesses operating on fixed price contacts hit with labour and materials shortages (with accompanying price blowouts) not exactly a new story though one the general punter probably doesn’t understand.

    So no upcoming stimulus, tightening credit cycle and builder collapses every other day…. I guess we wont be getting a positive supply side reaction anytime soon and that should factor into any modelling or speculation as to the future path of property prices and rents.

  3. Don’t worry about the builders. They made off like bandits for years. Many were developers/speculators too and made a fortune. Now that a few contracts have gone sour they close shop leaving debts and carnage in their wake and through their company structures they will lose nothing. Seen it many many times.

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