Warnings more construction firms to collapse as building costs blow out by $76k
New figures have revealed that the cost of building a home has jumped by a whopping $76,000, which means more construction firms will “hit the wall”.
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The cost of building a house skyrocketed by a record $76,715 in April as supply chain and labour shortages continued to bite, with alarm bells sounding that more construction firms will collapse in the coming months amid soaring prices making fixed price contracts unprofitable.
It comes as the number of construction companies going under this year has accelerated, with predictions that huge jumps in prices will not ease and are set to continue into the next financial year.
The $76,000 increase in building also means for the first time the national average value of new homes approved has jumped over the $400,000 mark at a time when house and land packages were seen as an affordable entry point for first home buyers and families.
Economist Maree Kilroy said the huge backlog of work and global commodity price increases will continue to hit the industry.
“Pressure being faced by home builders is not set to abate in this environment, and we expect more builders to hit the wall, especially less capitalised small-to medium-sized operators,” she told the Australian Financial Review.
The construction sector has been hit by a wave of construction firm collapses this year shaking confidence in the sector.
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In February, building giant Probuild sent shockwaves through the industry when it went into liquidation, followed by Gold Coast-based firm Condev, while Australia’s largest home builder Metricon was recently thrown a $30 million lifeline to keep the struggling business afloat.
Smaller operators have also fallen over including Hotondo Homes Hobart, Home Innovation Builders and Sydney-based Next, while staff at Queensland builders Pivotal Homes’ were all terminated on the spot last week.
Over the weekend, Queensland construction firm Solido Builders also revealed it had sadly appointed liquidators.
Experts have agreed that the construction industry’s horror run means it is most at risk for more insolvencies.
Russ Stephens, co-founder of the Association of Professional Builders, has estimated around 50 per cent of Australian building companies are currently trading insolvent – which means they can’t pay their bills.
National Australia Bank chief executive Ross McEwan has said construction was the “most worrying sector” for the bank’s loan book.
ANZ chief Shayne Elliott has described the construction industry as a “fragile sector”, adding that business were struggling to pass on higher costs were also more at risk of failure in a downturn.
“The business model has moved towards a fixed price contract model. The problem with that is that when you end up with cost shocks or labour shortages, the business can’t pass it on,” he told an Australia-Israel Chamber of Commerce lunch.
“So you are in this weird situation, which is sort of counterintuitive: construction is booming, and construction companies are falling over.”
It comes as the Australian Bureau of Statistics showed dwelling approvals were well down from April 2021 levels with a 32.4 per cent decline.
From March to April new dwelling approvals also fell by 2.4 per cent to 14,908 – outstripping economists expectation of just a one per cent dip.
JP Morgan economist Jack Stinson predicted building approvals will continue to plummet as interest rates rises and house prices fall.
The end of the federal government’s HomeBuilder grant combined with significantly rising costs in the construction sector will continue to cause a steady decline in building approvals throughout 2022, added CreditorWatch’s chief economist, Anneke Thompson.
“Most builders and subcontractors are at workload capacity, and poor weather in NSW and QLD exacerbated by the late delivery of building supplies across the country has delayed many existing projects, reducing the capacity for future approvals,” she said.
Rising interest rates will also have a knock on effect for demand for new homes, although this could help cost and capacity pressures plaguing the industry, Ms Thompson added, although other experts have argued a lack of building pipeline could financially cripple companies.
“It may also help reverse the growing number of construction companies unable to meet payment deadlines. CreditorWatch data has shown the sector is a repeat offender when it comes to late payment time,” she said.
Its data has shown 12 per cent of construction companies average more than 60 days in payment arrears which has seen contractors focusing more on government contracts where their pay cheques are certain, also impacting available builders to complete work.
Originally published as Warnings more construction firms to collapse as building costs blow out by $76k
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