Construction sector insolvencies surge in final months of 2022: ASIC

Construction businesses endured their second toughest year in a decade last year. And industry groups fear worse is yet to come.

Housing construction has had a tough year, and builders aren’t out of danger yet.

Victoria’s construction sector endured its second toughest year in a decade in 2022.

Latest figures from the Australian Securities and Investments Commission show 499 businesses in the industry, which covers home builders, renovators, demolition as well as subcontractors, were placed in administration in the past year.

It’s behind 2019 when 541 businesses went broke, but with 112 of that year’s losses recorded in the month of July alone, the more consistent run of insolvencies at present has the industry concerned.

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Australian Builder’s Collective president Phil Dwyer said after speaking with numerous industry members, he feared the next three months “will be disastrous” for builders who don’t have some money behind them.

“We figure there will be a burst of insolvencies and then it will become a little bit more static,” Mr Dwyer said.

“The builders who are on a knife edge now and trying to keep going only need one thing to go wrong. But I’d love to be wrong about this.”

Subcontractors have enjoyed good conditions as demand for their services soared, but builders have faced the brunt of rising material costs after signing fixed-price contracts with buyers.

An increase in construction insolvencies before the end of June could cement it as the sector’s worst financial year in a decade.

An increase in construction insolvencies before the end of June would likely cement it as the sector’s worst financial year in a decade.

Calendar-year ASIC figures end at 2014, but industry sources noted 2013 had been a healthy year and high numbers had not been recorded.

VICTORIAN CONSTRUCTION BUSINESS INSOLVENCIES

2014 – 473

2015 – 452

2016 – 409

2017 – 398

2018 – 389

2019 – 541

2020 – 311

2021 – 364

2022 – 499

Source: ASIC

Mr Dwyer also seconded industry sources who suggested that while insolvencies in most years were lead by small subcontracting businesses — with limited impacts to homeowners and employment — the current figures were likely dominated by builders with much more wide reaching implications.

“It’s mainly because of the fixed-price contracts and everything going through the roof cost wise,” he said.

Housing Industry Association chief economist Tim Reardon said the year ahead would provide mixed conditions for builders with material price and wage growth both slowing, but the volume of new home builds also set to decline after eight interest rate hikes constrained homebuyer borrowing power last year.

Construction timelines should contract in the year ahead.

“With this slowdown we will see shorter build times and smaller increases in the price of materials,” Mr Reardon said.

“These two factors were the major driver of insolvencies in the sector. So as the volume of work on the ground, and prices, stabilise, the number of insolvencies is also expected to stabilise.”

However he warned while this was good news for buyers who could get finance in the short term, the industry was facing long-term turmoil.

HIA figures released earlier this week show Victorian new home sales at the end of 2022 were 36.4 per cent below where they were at the same time in 2021.

They also revealed, nationwide, one in five homebuyers were cancelling a new home build project each month as rate hikes crushed their home dreams.

One in five new homebuyers is walking away from their dream partway through the process.

“This is likely to see the market increasingly competitive in 2023 as builders pursue the smaller number of customers that can gain access to finance,” Mr Reardon said.

“But the significant rise the in the cash rate will more than offset the strong economic conditions, low unemployment and the return of migration causing a building downturn that is expected to be the worst in a decade.”

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