Small builders struggling to survive as construction sector dominates insolvencies

Smaller builders are bearing the brunt of a continued wave of insolvencies in the construction industry.

New quarterly commercial insights data from Equifax reveals a high, but slowing, insolvency rate in the construction sector, with credit ratings pointing to an ongoing slowdown in insolvencies in the year ahead.  

Brad Walters, Head of Product & Rating Services at Equifax, said the data also reveals a worrying disconnect between Australia’s urgent need for housing and the financial health of the sector meant to deliver it.  

Equifax research revealed that construction credit demand fell just over 10 per cent in Q1 2025, driven largely by an 18 per cent drop amongst small and medium enterprises (SMEs), despite increased demand for housing supply.

“Compounding the concern, Victoria, Queensland and New South Wales, the states most critical to unlocking supply, are leading the decline in credit activity,” Mr Walters said.

“A spike in credit applications from higher risk construction SMEs could indicate some are seeking supplemental lines of credit to keep their businesses afloat. 

“The slowdown in borrowing is yet another signal that the industry is under immense pressure – right when we need it to be ramping up.

“The construction sector faces the highest insolvency numbers and the longest loan repayment periods, with repayment times worsening over the past three years.” 

There were, however, some emerging positive signs.

Although construction continues to have the largest share of insolvencies in the market, credit ratings point to an ongoing slowdown in such business collapses in the year ahead.

“This is undeniably welcome news, especially considering the construction industry’s vital role in our economy and its essential contribution to meeting our housing supply targets and infrastructure needs.”

Australia is forecast to miss its 1.2 million new homes construction target by almost a year, but Housing Industry Association (HIA) Chief Economist, Tim Reardon, said the sector is showing signs of improved confidence following a period of weak activity, particularly in apartment construction.

A new HIA report forecasts that home building will fall 20 per cent short of the Australian Government’s target over the five years. Separate reports have suggested Australia is short by more than 83,000 skilled construction workers, with that situation only worsening.

The number of homes commencing construction in Australia is, however, set to increase over the next few years, driven by strong population growth, low unemployment, and falling interest rates.

Long-term structural issues continue to pose risks to housing affordability and national supply targets, according to the latest outlook from the HIA.

“We expect new home commencements to increase steadily through the second half of the decade,” Mr Reardon said.

“Detached house building will lead this recovery, peaking in 2027, with apartment construction set to follow as market conditions and policy settings improve.”

Labour shortages ongoing

Recent interest rate cuts and historically strong migration are adding to demand for new housing. But ongoing constraints including land shortages, regulations and taxes are increasing the cost of construction and limiting supply. This will continue to drive up the cost of both renting and buying a home.

Building approvals are up for the year but a shock turnaround in the latest monthly data spells more trouble for the housing supply crisis inflicting Australia.

The health of the sector varies from state to state.

While detached housing is showing strong growth in Western Australia, South Australia, and Queensland, activity remains subdued in New South Wales and Victoria.

Annie Liang, Co-Founder, Billie Onsite, said labour shortages, outdated systems and site inefficiencies are contributing to and exacerbating the construction industry’s struggles.

“When a builder becomes insolvent, it often triggers a domino effect across the industry. Subcontractors left unpaid may also face financial distress, leading to further insolvencies.

“Cost-cutting measures in response to financial pressures can result in substandard workmanship, increasing the likelihood of defects including latent ones,” Ms Liang told API Magazine.

Surveys found that site inefficiencies caused by poor communication and mismanaged documentation are leading to costly rework and project blowouts, with 52 per cent of rework in construction stems from miscommunication while 90 per cent of site workers say they lack real-time access to project data – resulting in compounding delays and budget overruns.

Ms Liang said there was an urgent need to expand construction progress inspection coverage and depth and enhance stakeholder collaboration to rectify issues.

“Currently, most issues discovered in inspections are not tracked until resolution, which may end up becoming latent defects.

“We need to leverage the power of AI which systemises inspection findings and automates inspection reporting at every critical stage to enable more frequent checks without increasing labour costs.”

She added that latent defects, those construction flaws not immediately visible, pose a significant financial risk to construction companies in Australia.

“When these defects are discovered years after project completion, such as structural issues or waterproofing failures, the costs to rectify them can be substantial often leading to financial distress and in some cases, insolvency.

“This issue is particularly critical given the extended defect liability periods in Australia, which can hold construction companies accountable for up to 10 years.”

New home sales rise

New home sales rose by 16.5 per cent in April to its highest level in 12 months, according to the HIA New Home Sales report released Monday (26 May).

The report is a leading indicator of future detached home construction and suggests home building may be past its trough.

HIA Economist Maurice Tapang attributed the rise to the recent interest rate cuts.

“This activity increase will be modest nationally and inconsistent across the regions, with states such as Queensland, Western Australia and South Australia being key growth drivers.

“Sales have also improved in New South Wales at the start of this year, although this is coming off anaemically low levels in the last two years.

“Victoria had a poor start to 2025, recording consecutive months of declining sales, which left sales in the last three months to April 2025 down by 17.7 per cent compared to the same time in the previous year.

“With another rate cut having been delivered in May and expectations of further cuts on the horizon, it would not be surprising to see increases in new home sales in the months ahead,” Mr Tapang concluded.