More builders likely to fail in absence of any construction silver bullet

The continued surge in building industry insolvencies is showing no signs of abating and widespread hopes, or even expectations, that construction costs will fall and come to the rescue appear overly optimistic.

In the first seven months of this financial year, 1,999 construction firms were declared insolvent. This was 26 per cent higher than the same period in 2023-24 (1,583) and 69 per cent higher than 2022-23 (1,182).

Much of this has been blamed on high construction costs and a lack of skilled labour to do the actual work of building much needed new homes.

Neither causal factor looks like going away, suggesting the onslaught of building company failures would continue deep into 2025.

Construction cost growth has eased somewhat over the past year, but it is still running above general inflation, despite easing prices for steel and other commodities that spiked during 2022 and 2023.

I am constantly surprised about how ingrained the idea is that because we had large increases in costs recently, that we should in turn see construction costs fall.

- Adrian Hart, Oxford Economics Australia

Construction activity is actually still rising but this growth is only exacerbating the skills shortage.

Adrian Hart, Head of Construction and Infrastructure Consulting at Oxford Economics Australia, on Monday (24 February) said Australia is not likely to avoid future skills and capacity risks without serious improvements in productivity, with states such as Queensland and Western Australia facing the greatest challenge.

Supporting that assertion is new data from the Australian Securities and Investments Commission (ASIC) showing company collapses in WA surged 24 per cent in 2024, with construction companies the hardest hit.

“The fact is, we have allowed education, training and skills development to wither over the past decade and are now paying the price for this shortsightedness,” Mr Hart said.

“VET completions in construction-related fields are down nearly 55 per cent since 2012, engineering-related VET completions are down by almost 60 per cent.”

Construction activity in Australia is projected to continue rising over the second half of this decade. Overall, construction work done grew 5.1 per cent in real terms over the year to September 2024. Although real growth is forecast to slow to 1.5 per cent across FY2025, successive years of growth from here will see activity nearly 8 per cent higher again by FY2030 than it is now.

Karen Dellow, Senior Audience Analyst, PropTrack, said new home approvals have been trending upwards since March 2024 but are still below the federal government's Housing Accord target.

New approvals need to hit an average of 20,000 per month to reach the government's 1.2 million new homes target by mid-2029.

So far, they have been averaging 14,800 per month since the start of the financial year and are showing no signs of increasing to the monthly levels needed to reach the goal.

However, approvals have been trending upwards on a monthly basis since March, although only by an average of 2 per cent a month.

Business insolvencies, labour shortages and construction costs were all in the mix.

“There are several factors that are affecting the number of new developments going up for approval, particularly the decrease in the number of construction companies compared to five years ago, affecting building approvals and the new homes pipeline,” Ms Dellow said.

“The cost of building has also increased since the pandemic, with everything from metal and bricks to plumbing and ceramic products all more expensive.

“Additionally, a lack of skilled labour is driving up wages, which adds to the cost of construction.

“All these factors are slowing down the construction pipeline, which has been over $70 billion since December 2022,” Ms Dellow said.

“With so much money and labour tied up in these projects, it is hard for construction companies to commit to more projects,” she added.

“Most of the backlog began during the pandemic, due to site closures and labour shortages, but at least now the ongoing work in the pipeline has levelled out and has remained relatively stable for the past few years.”

There were, some greenshoots for the construction sector.

Maree Kilroy, Lead Economist, Construction & Property, Oxford Economics Australia, said house approvals have turned the corner without the help of interest rate cuts, with domestic property investors playing a larger role in the house and land market than before.

“While some signs of weakness in land sales and enquiry indicators suggest a sluggish start to 2025 for approvals, we still expect house commencements to grow seven per cent to 108,136 in FY2025.”

She did, however, add that after booming over FY2023, build-to-rent starts are estimated to have ended FY2024 down 19 per cent to 5,290 and little change from this level is anticipated this financial year.

“A pickup is expected from FY2026 as financing costs ease, while policy uncertainty, which has held back some institutional investors, has faded.”

Will construction costs fall?

The signs of that happening appear remote.

Residential construction costs grew 3.4 per cent over the 12 months to December 2024, the largest annual increase in construction costs since the year to September 2023 (4.0 per cent), according to CoreLogic's latest Cordell Construction Cost Index (CCCI).

On the outlook for costs, Mr Hart of Oxford Economics believes there are fundamental misconceptions about what the long run or ‘new normal’ cost growth looks like.

“I am constantly surprised about how ingrained the idea is that because we had large increases in costs recently, that we should in turn see construction costs fall – rather than slow in growth – in real terms from here and over the long term,” Mr Hart said.

“Long run data doesn’t show that; there is no Reserve Bank ‘target range’ for construction costs as there is with the CPI, and there is no reason for it to match growth in CPI either given its composition.

“The best we can really hope for is for productivity growth to improve.

“This will offset average growth in the price of inputs, particularly wages, so growth in real costs can be minimised.”

After the quarterly change in construction costs eased to below 1.0 per cent in 2023 and the first half of 2024, the quarterly pace of growth rose to be in line with the pre-COVID decade average of 1.0 per cent through the second half of 2024, shifting the annual trend higher, according to the CCCI report released a few days ago.

CoreLogic Economist Kaytlin Ezzy said the latest data represents another challenge for an industry that is already struggling.

“Residential construction companies continue to face profitability challenges with the CCCI up 30.8 per cent since the onset of Covid.

“Outside of compressed margins and continued labour challenges, the construction industry is also facing a looming shrinkage in the construction pipeline.”

She said building commencements have trended lower, with ABS data for new dwelling commencements over the year to June 2024 at 10-year lows.

“These factors combined have contributed to an increasing number of liquidations, with 2,832 construction companies becoming insolvent in the 2023-2024 Financial Year, representing the greatest proportion of company collapses.

“Although up over the year, dwelling approvals over the 12 months to November also remained 7.1 per cent below the decade average, suggesting this shortfall of new projects entering the construction pipeline may continue for some time.”