Construction collapses loom after stimulus wind-back

Builders are warning of widespread construction company collapses next year, with demand for new housing expected to nose-dive in 2022 as government stimulus winds back.

While 2021 is expected to be a bumper year for builders across the country, Association of Professional Builders co-founder Russ Stephens said the landscape would be significantly different next year when JobKeeper is phased out and the HomeBuilder stimulus scheme runs its course.

As of December 4, the Homebuilder grant package has created 32,464 new builds or substantial renovation jobs, according to Federal Treasury data.

Mr Stephens said it would be a significantly different story, however, once the stimulus package expires on March 31.

He said new home builds were likely to dry up once the HomeBuilder grant is phased out, while mortgage stress would also be exacerbated when home loan deferrals from banks also expire.

“These factors will lead to less demand for residential construction and will come after a ‘boom time’, which has generated high positive cash flow for builders and created a significant spike in their work in progress accounting adjustment (WIPAA) liability,” Mr Stephens said.

“Once the market softens, those builders that are unaware of this hidden liability will find there is not enough cash coming in to cover the debt that has been previously created.”

Mr Stephens said early respondents to an APB survey showed 79 per cent of Australian builders were not calculating their WIPAA correctly each month.

“This is a big problem at the best of times, but right now, when residential home builders have never been busier and are signing more contracts than ever before, it’s a recipe for disaster,” Mr Stephens said.

“Builders will start to experience severe cash flow problems as soon as sales stop growing, which we anticipate will be the case in early 2022.”

Mr Stephens said the survey also revealed more than a third of builders did not understand the difference between markup and margin, while 70 per cent of the companies surveyed were operating without a CRM system.

He urged builders to put systems in place now to ensure their businesses remain viable when demand slows.

“Planning and budgeting now for the tough times that are coming is vital, as will be implementing a financial system for extracting the true financial data, rather than simply relying on the generic reports generated by standard accounting software,” Mr Stephens said.

“Builders should also be looking at a project review process in order to reassess their supply chains and plan future service levels using construction slots.”