The latest insolvency data from ASIC showed that 1,236 companies in the construction sector have already gone into this financial year, which Equifax’s head of product and ratings services, Brad Walters, believes will worsen over the next 12 months.
“For another six to 12 months, it’s going to continue to be a tough environment in the construction industry”, Walters told The AFR late last month.
“Nine out of 10 unsecured creditors get nothing back”, Walters said. “A lot of people are watching the construction industry very particularly because of the trends we’re seeing gather momentum”.
Likewise, new Mirvac CEO, Campbell Hanan, warned of rising builder insolvencies amid tighter financing conditions and rising costs, which will create a “dire” shortage of housing over the next four or five years.
“That’s a product of a host of things”, Hanan said.
“The most obvious is we’re not building enough, and now we have the added pressure (in the) construction sector and subcontractor markets where the cost of doing business has increased”.
“Often those contractors and builders have set prices in a historic framework, which they’re struggling to meet”.
Hanan believes the rise in insolvencies across the construction and subcontractor markets are “the canary in the coalmine” for the industry.
The home building industry has been caught in a perfect storm.
First, the former Morrison Government’s HomeBuilder stimulus drove a massive increase in demand, with builders signing fixed price contracts.
Then materials costs soared, pushing construction costs above those fixed contract prices, causing many builders to go bust.
Now, the Reserve Bank of Australia’s (RBA) 10 consecutive interest rate increases has lowered borrowing capacity by around one third and lifted variable mortgage repayments by around 50%.
This monetary tightening has caused new home demand to collapse, as evidenced by construction loans falling to GFC lows:
New home sales more than halving:
As well as dwelling approvals tanking:
While the pipeline of unfinished homes from the HomeBuilder stimulus will keep builders busy this year (albeit at poor margins), building activity will collapse in 2024, based on the above forward-looking indicators.
This situation should also worry Australian tenants, who are facing double-digit rent increases amid the tightest rental vacancies on record.
With net overseas migration into Australia breaking all records amid falling housing supply, the rental market is destined to tighten even further this year and next, placing unbearable strain on lower-income Australians.
