Building industry braces for “massive collapse” amid escalating losses

An expert is warning that Australia’s building industry is facing a “massive collapse” and financial ruin amid a perfect storm of fixed price contracts and soaring input costs.

According to Russ Stephens from the Association of Professional Builders (APB), around half of all Aussie home builders are experiencing negative equity, with the industry facing a “massive collapse”:

APB Co-founder Russ Stephens said there had been a change in the mix of builders who were struggling as larger companies felt the pinch.

“At the back end of last year it was more the smaller builders and the bigger ones had cash reserves,” he said.

“This change is simply because the large building companies signed so many contracts under the government’s stimulus.

“They signed two, three or four times the amount of contracts they would normally sign in that period.

“The reasons that’s so important is because the companies that signed so many haven’t been able to build that amount.

“That’s caused a backlog and then, with prices rising the way they have, the bigger companies are losing money on projects. They’re still working on projects from 18 months ago”…

Mr Stephens said this meant about 50 per cent of builders were believed to be running a loss without showing it and that action was needed to stop a “massive collapse”.

Russ Stephens of APB was featured in another article where he claimed 80% of Australia’s 10,000 to 12,000 building firms had lost money over the past 12 months:

“Eighty per cent of builders in Australia have lost money in the last 12 months. That’s horrific,” he added.

“Around 50 per cent of building companies in Australia are currently experiencing negative equity.

“About 25 to 30 per cent [of these companies] can’t pay their bills on time”…

“The first step [of a company collapse] is where the business loses so much money they have negative equity”…

The second step is insolvency, at which point the company is essentially finished…

“If the rules were followed as they’re intended, half the industry is going to be wiped out”…

It is fair to say that the Morrison Government’s HomeBuilder stimulus has turned out to be a disaster for the industry, since it drove a huge lift in new home demand at the same time as inputs became increasingly scarce.

Accordingly, builders signed many contracts at fixed rates and then competed with each other for scarce resources, driving up costs even further. Construction times blew out with input costs continuing to soar.

The end result is that most builders are experiencing a “profitless boom”. Volumes are booming, yet they are losing money at an alarming rate. Many Aussie builders have already gone bust, with more to follow.

HomeBuilder has ended up being another epic policy failure of the Morrison Government. Rather than ‘saving’ the building industry, it has ended up hastening its demise.

Unconventional Economist
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Comments

  1. Hill Billy 55MEMBER

    Interesting, I have been approached by a new client, a tradie, who is just thinking about his 2021 return. He’s registered for GST, so he’s got effectively 2 years GST returns to do. Just looking at his turnover, he has trebled his income this year, but has no money for tax or GST. OUCH!!!!

  2. The old adage “money buys everything but pays for nothing”.

    Money is only a medium of exchange.

    ManA does workA creating thingA for money from ManB.
    ManB does workB creating thingB for money from ManA.

    At the end of the day, ManA gets thingB for his work, and ManB gets thingA for his work. Money was used, but was not created or destroyed in the process. The money buys everything but pays for nothing.

    The politicians we have elected do not understand this. We elected people who believe that extra money can solve a problem that actually requires extra goods (things).

    In the case of housing, the politicians we elected have come up with all sorts of schemes to deliver extra money, but not deliver extra housing.

    Years ago, the politicians we elected thought it would be good if more houses had pink batts in the roof. (A good idea). So what was needed was more pink batts. We needed a plan that would create a temporary increase in the production and installation of pink batts until the shortfall could be met. Then batt production could fall back to baseline.

    However what the politicians we elected did instead was to hand out extra money ($1400 per house) and expect this to be a good solution. It was not. There was instantly a shortage of quality honest pink batt installers. This vacuum created many unskilled and dishonest installers who were only interested in the $1400. The result was poor quality installation and deaths.

    • You forgot to mention that four people had already died in a similar program in New Zealand. If our leaders had taken any notice of that, they could have prevented the four deaths which happened in Australia afterwards.

    • drsmithyMEMBER

      Years ago, the politicians we elected thought it would be good if more houses had pink batts in the roof. (A good idea). So what was needed was more pink batts. We needed a plan that would create a temporary increase in the production and installation of pink batts until the shortfall could be met. Then batt production could fall back to baseline.

      However what the politicians we elected did instead was to hand out extra money ($1400 per house) and expect this to be a good solution. It was not. There was instantly a shortage of quality honest pink batt installers. This vacuum created many unskilled and dishonest installers who were only interested in the $1400. The result was poor quality installation and deaths.

      On the flipside, when the Government tries to do things properly, it is inevitably attacked as imposing bureaucracy, adding “red tape”, creating inefficiency, preventing private industry from innovating, etc, etc.

    • Arthur Schopenhauer

      Its always surprising how little profit companies in the construction eco-system make. Architects, Engineers and commercial Builders complain endlessly about it. Where does the money go?

      • Many “off-the-shelf” building products are used, which save small amounts of time, and labour has traditionally been expensive so it was considered worth it. A lot of it is manufactured overseas.

        But now many materials are in short supply, and overall are making up a large % of a project cost as supply chain delays and fuel prices bite.

  3. Magnus MaximusMEMBER

    Are we supposed to shed a tear for builders/tradies who have been making bank the last 2 decades for mostly poor work with imported Chinese building materials? Bad news for Bunnings and Ford’s Ranger factory in Thailand. Good news for everyone else.

  4. One trick ponyMEMBER

    If the value of actual homes (excluding land) are presumably increasing because of replacement cost inflation, but property prices are declining (a given) – then doesn’t it follow that it is specifically land values that are going to take the real bath here? Genuine question.

    • Great question. My home rates are based on unimproved land value so if you are right, we should get a fall in things like rates and maybe stamp duty which creates an income issue for state and/or local governments.

      • Fabian AlderseyMEMBER

        In the ACT at least, there are two components to the rates – the unimproved land value, and the multiplier. Basically, government needs a certain amount of money to pay for services, so if the land value falls, the multiplier will rise to compensate.

      • drb1979MEMBER

        When Perth had many years of stagnant/slightly declining land values after 2011 council rates didnt decline – the councils raised the % rate they charge on land values.

        I was naïve to think local councils could do with a reduction in income!

    • two plus twoMEMBER

      Endlessly manipulated on the way up with subsidies, fig leaf regulation, fiscal and monetary policy all combining into this mountain of future hurt. Agree. Let it burn. Anything else would be to throw more good money after bad. Better to hang on to whatever bailout money there might be and it to truly rebuild from the quality green shoots after the purge.

  5. Another taxpayer bailout coming, but maybe Labor could put tariffs on commodity exports so they can cover these costs and balance the budget so they can be best economic managers.

    • Well spotted. These construction companies are scraping the bottom of the barrel. Built a few decks no wuckas well put you in charge of a 20 million job. The lack of experience in the industry is insane. None of the so called managers have any decision making nouse. It bloody hilarious, if I was an average punter I wouldn’t bother trying to build anything with lack of protections and plicks charging for services they don’t have the skills to provide. Here’s looking at you design managers and project manager s. The industry needs to move back to a fixed fee arrangement. Private certification does not work. Fees for construction professionals have been destroyed by competitive contracts all in contractors favour. I say eat sh1t and die to these kept on life support.

  6. MathiasMEMBER

    Queensland’s social housing register list the ‘size of Gympie’s population’ as government recycles investment announcement
    https://www.abc.net.au/news/2022-06-20/qld-social-housing-crisis-state-government-announcement/101166580

    Its good to see Labor at least pretending to do something about Australias Housing Crisis.

    I dont think anyone really has a clue whats going on in Australia anymore. Australias gone to complete hell.

    Best to just take 6 months off, ignore the world, let all the crazy happen and see what results have been achieved in 6 months.

    -looks at the AUDUSD and notices big disasters ahead-

    There are crazy times and then there are crazy times. We really are living in crazy times heh.

    • Agreed. You would be far happier getting off the Internet and just living in the woods in a tent for a few years.
      That is my suggestion anyway and I am unanimous in that.

  7. This is too big to bail out.

    Builders and tradies are only popular amongst themselves.

    Bailing this lot out would have a strong political pong if Labour or the states were to go there.

    • It’s too big too fail- must be bailed out. Housing/building is Australia’s main industry. I will be happy to bail out construction industry when a tradie’s labour rate drops to $50/hr.

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