More building company collapses appear inevitable as conditions deteriorate
Home building activity continues to decline, with little end in sight to the challenging landscape facing builders that has already brought thousands of businesses to their knees in the past two years.
Persistently challenging conditions within the building and construction sector suggest that even more building company collapses are inevitable.
The collapse this week of Tasmanian company Multi-Res Builders, which left many homeowners, creditors and contractors stranded and out of pocket, has only reinforced the sense of contagion gripping the building industry.
New insolvency figures show 2,500 home builders have collapsed in the past two years, with two thirds of those falling over in the past 10 months.
There has been a rapid slowdown in the volume of new building projects entering the pipeline, especially new apartments, over the past year.
Builders and industry peak bodies alike have made it clear the next 12 to 18 months will be a defining period for many building companies.
As an industry, we have been facing the ultimate test of resilience that has nothing to do with capability.
- Shani Naleshni, Director, The Home Establishment
Housing Industry Association (HIA) Chief Economist Tim Reardon said there were very few indicators to suggest the building landscape was improving.
“Leading indicators of home building activity have fallen to exceptionally low levels.
“New home sales are almost 50 per cent lower than a year ago, while lending for the purchase or construction of a new home has fallen to its lowest level since 2008.
“The slowdown in the commencement of new homes is counter to the goal of increasing supply and delivering one million homes over the next five years,” he said.
The Labour Government’s Accord has set out to deliver a million “well located homes” over five years.
“Beyond the rise in the cash rate, the supply of new homes is also constrained by a range of regulatory and cyclical challenges. The Government’s Housing Australia’s Future Fund isn’t a solution to all of these problems, but it is a necessary step toward improving the supply of new homes.”
Lending for the purchase or construction of a new home has fallen to its lowest level since 2008.
He attributed the rise in the RBA’s official cash rate as the key reason for the slowdown in the number of new homes commencing construction.
“There are long lags in this cycle and the full impact of the increases to date will not be apparent, until late 2024.
“Leading indicators of home building activity have fallen to exceptionally low levels and new home sales are almost 50 per cent lower than a year ago.
“Removing barriers to investment, reforming local council planning processes and stable economic settings are also necessary steps,” Mr Reardon said.
Builders worried about future
The staggering number of builders to collapse in the past 18 months is a portent of things to come if changes are not made to the building industry soon, according to one boutique New South Wales-based building and development company.
The first quarter of 2023 saw the lowest number of building approvals since 2012, just as population growth reaches a record high.
Shani Naleshni, Director of The Home Establishment, said companies delivering projects to the lower end of the market faced the stiffest challenges.
“The reduced ability of many borrowers and changes to the National Construction Code that commence from May 2023 and result in increased prices will play its part, especially at the lower end of the housing and apartment markets where there is a lot of similar stock,” she said.
Even as a builder, Ms Naleshni said homebuyers should focus on established dwellings.
“The days on market for home and land packages has increased significantly, as it carries a risk for financiers.
“Land sales have also dropped dramatically along with apartment sales in many parts of NSW.
“The safest option for consumers and financiers is purchasing a finished home, rather than off-the-plan,” Ms Naleshni told API Magazine.
“As an industry, we have been facing the ultimate test of resilience that has nothing to do with capability from trades - there are some incredibly talented and skilled workers that have still been badly impacted by industry situation.”
Buyers are even steering clear of properties requiring renovations, as they look to avoid lengthy waits for work to be done.
Building industry 'fragile'
It is a 30 per cent surge in residential construction costs over the last two years that has prompted developers to shelve projects as property prices in Sydney and Melbourne flatline.
According to new analysis by KPMG Australia, almost 16,400 dwellings in New South Wales were approved but not yet commenced by the end of March, up from 13,800 at the same time last year.
The last time construction levels stalled with a high number of approvals in New South Wales was in 2019, when developers were not commencing projects due to historically high vacancy rates (around 3.5 per cent in Sydney, compared to about 1.4 per cent today).
In Victoria, almost 10,500 dwellings were approved but construction had not yet commenced by the end of March, up significantly compared to 5,000 dwellings in March the prior year. Only December 2017 recorded a higher number (11,400) of dwellings not yet commenced.
Around three-quarters of the not-yet-commenced dwellings in New South Wales and Victoria are slated to be apartments or townhouses.
“Property developers are shelving projects because of soaring costs and lacklustre property prices and some are even going bust,” KPMG Urban Economist, Terry Rawnsley, said.
Between March 2020 and March 2023 residential construction costs increased 29 per cent in Sydney and 32 per cent in Melbourne.
Speaking on ABC Radio on Thursday (18 May), Denita Wawn, CEO Master Builders Australia, said the building industry was in a precarious position.
“The industry is in a fragile situation, where we are building at a loss in many instances at the moment because we are stuck with fixed-price contracts with no escalation clauses, which has meant the builder alone has been covering these significant rises in housing costs of 20-30 per cent or more,” she said.
“They are dealing with labour shortages and therefore under huge cashflow pressures and when you combine that with no forward contracts and significant decline in that demand, that’s really put massive pressure on.”
Ms Wawn said it is a structural problem that needs to be addressed.
“It’s reinvigorated the discussions around how best to ensure we’ve got appropriate risk-sharing between the entire building supply chain.
“It is disappointing for the clients, subcontractors and of course the builders themselves that we find ourselves in this situation.”