Surprise building insolvency stats, dire warning from industry groups

Shock stats have revealed how Victoria’s building sector has really coped with soaring material costs — and there’s been a dire warning from industry groups about the future.

Construction insolvency stats show fewer than expected builders have failed in the past two years, despite significant headwinds for the industry.

Victorian builders face years of uncertainty, with a respected veteran warning of a pre-Christmas insolvency uptick and industry groups warning business collapses will accelerate.

It comes as new Australian Securities and Investments Commission figures show a 12 per cent surge in builders going to the wall in the three months to April, compared to the final quarter of 2021.

But incredibly, despite the recent lift, the Victorian construction community could be on track for its lowest number of insolvencies in a financial year for at least nine years.

RELATED: What building company collapse ‘doomsday’ could trigger

Two NSW building companies collapse owing hundreds of thousands

Real Estate auction blog: Livestreams and rolling updates from around Victoria

ASIC’s latest data shows 291 builders failed in the 10 months to April.

If the numbers continued on an annualised trend, and another 29 builders are lost in both May and June, the total would rise to just 349.

In the previous financial year the figure was 359, far below the average 433 building sector insolvencies for the nine years the ASIC data covers.

At its worst, the state lost 541 construction businesses in the 2013-2014 financial year.

The decrease comes despite Victorian Building Authority figures revealing the number of building practitioners has increased since the pandemic hit, from 23,890 in the 2018-2019 financial year to 25,489 in the 2020-2021 period.

Material shortages have caused delays and cost increases for builders.

Soaring material and labour costs have already pushed high-profile builders to collapse including Geelong-based Waterford Homes in June and industry giant Probuild in March.

Master Builders Victoria chief executive Rebecca Casson said the vast majority of Victorian builders, “if not all”, were experiencing a challenge to their profitability as a result of rising material costs and fixed-price contracts signed with buyers.

“MBV continues to advocate to the Victorian Government for the inclusion of rise and fall clauses in domestic building contracts,” Ms Casson said.

She pointed to a mix of now finished government pandemic support programs, and the Australian Tax Office providing a moratorium on debt as part of the reason building insolvencies had been lower over the past two years.

The end of those programs is now expected to see numbers rise.

Australian Builders Collective president Phil Dwyer echoed those thoughts and noted that with the headwinds facing the sector “I would have thought we’d be having a lot of insolvencies”.

“But I think we will see a lot of builders go broke – not so much in the next three months, but after that,” Mr Dwyer said.

There are fears more builders will fail as interest rates rise.

Housing Institute of Australia chief economist Tim Reardon said there were risks for builders who had expanded rapidly and taken on more builds than they would ordinarily do as the cost of building rose, but most knew how to minimise risk.

“Builders have been through these cycles before, though this is more extreme than most,” Mr Reardon said. 

“So the pressure point is only on a narrow range of home builders. For the majority of the industry, for subcontractors and suppliers, it has been very good business conditions.

“And they have had some very profitable years heading into the cycle, so the vast majority will continue to trade through this.”

While he did not say construction sector insolvencies would rise, the economist did note “we (HIA) expect home building to slow due to rising interest rates in 2024 and that’s when I would expect insolvencies to return to pre-Covid levels”. 

This could see dozens more builders going broke a year than have failed in the past year.

Where a builder does declare insolvency, their customers are shielded by the government funded Victorian Managed Insurance Authority. 

Sign up to the Herald Sun Weekly Real Estate Update. Click here to get the latest Victorian property market news delivered direct to your inbox.

MORE: What 1.75 per cent cash rate would mean for Victorian mortgage holders

First home buyers: one-third of Australian first timers can’t afford their homes

Winemaker Ben Haines toasts sale of Fitzroy North house

Originally published as Surprise building insolvency stats, dire warning from industry groups