The number of companies in the construction sector that have appointed external administrators so far in 2022-23 is nearly 90% higher than the previous corresponding period, according to data from the Australian Securities & Investments Commission (ASIC).
McGrath Nicol chairman Jason Preston says companies in the sector are likely to remain under pressure due to rising costs. He expects more construction companies to collapse, which will result in further consolidation in the sector and see more power shifting to contractors:
“They [have] multi-year contracts, the contracts were signed some time ago and the cash impacts of costs going up and delays start hitting towards the middle and back end of the contract. We’ve seen recently fallout in the space and I think we’ll see more”.
Meanwhile, Baker McKenzie partner and head of restructuring and insolvency Maria O’Brien said the construction sector was structurally challenged and faces a “long-term reckoning”.
To be sure, Australian home builders are facing pressures on multiple fronts.
First, demand was brought forward by the home builder stimulus, which will inevitably leave a deep demand vacuum once the current pipeline of homes under construction are completed.
Second, building and materials costs have soared on the back of global supply chain disruptions. And because so many builders signed fixed price contracts at the beginning of the pandemic, many are now facing huge financial losses and possible insolvency.
Finally, the sharp rise in interest rates and the fixed rate mortgage reset could result in some new home buyers defaulting on their building contracts, alongside falling demand going forward.
Rising debt costs has also placed home builders themselves under more financial pressure.
In short, a perfect storm has hit Australia’s home building industry, resulting in a wave of insolvencies that will likely worsen.
It has also come at the worst possible time given housing demand is ramping up via record immigration flows.
The inevitable result will be a worsening of Australia’s housing crisis.
