Russ Stephens from APB says interest rate rises could sink some major builders

A leading industry expert has issued a stark warning over the dangers facing major builders, saying many are facing a moment of truth. Here’s why he’s so concerned.

A leading industry expert says some major builders are like Ponzi schemes and face collapse if interest rate rises cause a slowdown in demand.

Gold Coast-based Association of Professional Builders (APB) boss Russ Stephens said many larger companies were reliant on new projects to cover losses incurred on contracts signed before prices escalated, leaving them vulnerable if work dried up.

“They are able to trade legally as far as they are generating positive cash flow. But what they are really doing is robbing Peter to pay Paul,” Mr Stephens said.

“They’re using cash flow from one project to pay people they owe money on another.

“As long as that continues, if they keep growing, they can potentially trade their way out of it.

“But if we hit a downturn, which it looks like we are likely to hit with interest rates continuing to rise, it’s like being in a Ponzi scheme really, if the cash inflow is slowed down, that’s when the whole scheme unravels.

“It works as long as there’s more cash inflows coming in. But as soon as that cash inflow slows down that’s when it can’t operate any longer.

“... Once we’ve had the Christmas shutdown and we move into 2023, any (builders) that don’t have sufficient reserves in place, they’re going to get found out when the tide goes out.”

Association of Professional Builders co-founder Russ Stephens.

The Reserve Bank last week lifted interest rates a further 0.25 per cent – its seventh straight rise – in a bid to tame runaway inflation.

The rises appear to be having the desired affect, with Housing Industry Association Senior Economist Nick Ward saying they were “weighing heavily” on demand for housing, with the full impact to be seen next year.

“Lending for the purchase or construction of a new home fell 9.3 per cent in the month of September to its lowest level since April 2019,” Mr Ward said.

“The total value of housing loans also fell by a further 8.2 per cent in September, to be 18.5 per cent lower than at the same time in the previous year.

“The RBA’s tightening is weighing heavily on demand for housing and the full impact will not emerge until the second half of 2023.

“... If these trends are sustained, which is expected, then the 2.75 per cent increase in the cash rate so far will have brought this boom to an end.”

The Reserve Bank has raised interest rates for seven months straight. (Photo by Lisa Maree Williams/Getty Images)

Mr Stephens, whose company helps builders manage sales and finances, said smaller builders on the Gold Coast had less to fear from the coming storm, having weathered rising prices better than their larger peers.

“The guys that have got a good handle on the financials have had a pretty good year, to be honest,” Mr Stephens said.

“They’ve been very profitable. We’re hearing a lot of good things from a lot of building companies. They had to clear those initial loss-making contracts which were signed in late 2020, early 2021. They lost money on those contracts.

“But when they cleared them, they adjusted their pricing very quickly and as a result they’ve had a very good 2022.

“The bigger companies signed so many contracts late 2020, early 21, that they’re probably still working on them now.

“So they were locked into a lot more loss-making contracts. They have work to clear their backlog.

“Those guys I think are still in a very serious situation with their companies.”

Association of Professional Builders co-founders Sky Stephens and her father Russ Stephens.

Mr Stephens said it had been a tough two years for builders and mental health issues remained a concern.

The APB had set up “chapters” around Australia where builders could meet peers and chat about their issues.

“They can just go along and chat. They don’t even have to be suffering anxiety and depression,” he said.

“They can just go and chat to other builders about the challenges going on in the industry.

“... It’s not necessarily people who are in despair. A lot of builders, they’re just feeling burnt out at the moment.

“We’re even seeing it among our own membership. Guys who have been successful this year, in spite of all the challenges, they’re feeling completely burnt out. It’s been mentally exhausting for them these past 18 months. They’re completely worn out and fatigued.

“We’re seeing that just having conversations with these guys, being able to talk about re-energises them to some degree. It allows them to refocus and to become more positive.”

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