Construction collapses to “wreak havoc” on economy

Australia’s home builders continue to fall like dominos with 10-year old Sydney building company Jada Group yesterday joining the long list of collapses, owing $2.4 million to 45 creditors.

Like the other collapses before it, the soaring cost of materials was cited as a key factor behind Jada Group’s demise.

Indeed, the next graphic from The SMH illustrates the extent of the issue, with costs soaring across the entire home building process:

Home building costs

Home building costs soar across the board.

The situation has been exacerbated by the Morrison Government’s $2.1 billion HomeBuilder stimulus program, which drove demand higher in the face of supply problems, thereby adding to the inflationary pressures. According to the Australian Treasury, HomeBuilder was inundated with 113,113 new home applications and 24,642 renovation applications, thereby helping fuel the pandemic construction boom across the nation:

HomeBuilder applications

Building applications soared under HomeBuilder.

Given most builders signed fixed price contracts, many were then caught short when construction costs soared, pushing their margins into negative. The result is the wave of collapses sweeping across the industry.

Denita Wawn, chief executive of Master Builders Australia, believes the residential construction industry has become the canary in the inflationary coal mine:

“Two years ago, contracts were being terminated because everybody thought they would lose their job. All of a sudden, JobKeeper and HomeBuilder came along and people weren’t travelling, the building industry went from no work to too much work”…

“It had to go somewhere, so people were spending it on their homes. We were a bit of a canary in the inflationary coal mine. Inflation hit us hard 12 months ago.”

In a similar vein, Housing Industry Association chief economist, Tim Reardon, noted that “it’s been very difficult for builders to price the construction of a home … given the rapid increase in prices and builders typically bear that risk”.

That said, Australia is not alone when it comes to home builder collapses. New Zealand ‘s construction industry is facing similar problems, which Master Builders Association national vice-president, Johnny Calley, believes has the potential to “wreak havoc” on the economy.

Calley claims inquiries for residential new builds have plummeted between 70% and 80% across New Zealand, reflecting “skyrocketing material costs, tougher bank lending, higher home-loan interest rates and soaring inflation”. In turn, there are now fears of mass job losses and builder collapses.

Ultimately, the world’s home building industries have been caught in a perfect storm of booming at the same time, with supply unable to keep pace with the unprecedented demand.

The resulting cost escalation is now sending builders broke, despite being busier than ever. Many are stuck on fixed-priced contracts and they are collapsing at an alarming rate.

Unconventional Economist

Comments

  1. ErmingtonPlumbingMEMBER

    It should sort itself out once the inflation has been accounted for in future contracts.
    I’ve got a mate who is employed by One of Australia’s biggest home builders and they have all been told that margins per home built are way down and could even go below Zero for a short time but the company expects to pick up a dramatic increase in market share during this inflationary period and expect to be price setters with bigger margins post “slowdown”
    They have got some big Japanese money behind them and own a lot of their materials suppliers.
    It will be interesting to see what kind of Consolidation we see in the industry.

    • Maybe in 5 years, not with present wage policies around the world……..need wage indexation for that to happen.

      https://twitter.com/profplum99/status/1549599452087783424

      Of course the long term effects of Covid disablement are showing up overseas in the jobs market but not here yet, and the recession will knock that on the head for a couple of years, there is a reason it takes a generation historically to recover from a pandemic

      https://twitter.com/CDAadvocate/status/1549493300549271555

      • We haven’t had a pandemic in healthy working age cohorts. Compared to other diseases like polio or Vit A deficiency blindness this is barely significant on a population level. It’s just our health system is not equipped to deal with anything out of the ordinary.

        • Nah heaps of crew I know are actually crook. Like sick enough not to work plus household of sick children ect to sort. And it’s at least the 2nd or 3rd time some of them are sick and they’re just as bad now if not worse than earlier. Most have got jack of the face-to-face work and are looking elsewhere. One girl’s a flight attendant and hadn’t got it until now and thought she was immune lol. She ain’t. A bit more reluctant to get back to work now on the dehli red-eyes.

      • Jumping jack flash

        On the other hand wages can’t increase too much now or that will be inflation, and promptly beaten down with the interest rate lever.

        It certainly looked as if they were only just recently setting up an environment for wage inflation, and then inexplicably they pulled the pin.

    • OfficeboyMEMBER

      Some builders with supply affiliations and shareholders will get through. But for the others will be a big ship to turn around , face losses first , feed in new working capital to raise the fresh sites, suffer deposit rate declines due to interest rate hikes at the margin , lose key staff and more. Cash is oxygen. Some might continue to hang the shingle out but in fact (imo) will be in paralysis standing bolt upright.

    • Arthur's Poodle

      Henley, right? Bet not many people know they are owned by a Japanese Industrial Conglomerate.

    • Agree

      A 10 year old company owing $2.5m to 45 creditors (i.e. 50k each) isn’t a big deal.

      Would happen all the time. It’s just getting reported now.

      We much more of these to determine a trend.

  2. Jumping jack flash

    Interestingly, most of the steel, plumbing, electricals, fittings and fixtures are imported. Transport costs increase as oil prices increase, but stuff bought directly from China hasn’t really risen in price all that much to be honest. Obviously it is the resale markup that is being jacked up by local importers and distributors.

    Also interesting that timber, which is probably not imported, is inflating the fastest. This may not only be due to gouging, but likely supply/COVID policies as well.

    But the general rule of thumb is everyone may as well try and gouge while the gouging is good. The opportunity for price gouging isn’t going to last forever.

    • Timber supply has been affected by the massive 2019 bushfires.

      Hard to replace stocks of something that grows so slowly.

  3. Stephen Morris

    Worse than materials cost escalation is the unavailability of materials altogether.

    In principle, materials cost escalation can be covered with escalation clauses.

    But if materials are not available at all, escalation clauses become meaningless. There’s nothing to escalate.

    Work stops . . . and interest expenses keep going.

    • ErmingtonPlumbingMEMBER

      We shouldn’t be importing any steel products at all into Australia.
      It should all be made here.

  4. You have a very very big problem when construction is something like ??13%?? of GDP (which is nuts high). Australia’s construction sector is going to contract in spectacular fashion over the next 12 months which will result in a lot of pain.

    This is just another part of Scummo’s legacy to explode leaving a total mess. Everything that fvkr touches turns to sh*t in the end.

    • Arthur's Poodle

      The man has already been forgotten, and the populous are in no mood for, “look, it was all Scomo’s fault”.

      The aftershocks of the LNP shvtshow might accelerate the establishment of a Federal ICAC as Albo’s lot look for a distraction.