Like an uncontrolled demolition, construction companies have been collapsing at a rate that has not been seen for almost a decade.
As of late 2023, data from the Australian Securities and Investments Commission (ASIC) shows that 2,023 construction companies have gone into liquidation since mid-2021.
This figure dwarfs the next industry sector (accommodation and food services) of 1,013 companies and makes up the lion’s share of 7,231 companies in total that have folded over the same period.
These are not small companies either. Clough Group, Probuild, Dyldam Developments, Snowden Developments, ABG Group and Condev have been some of the larger construction companies to fold, while one of the more recent casualties was Porter Davis Homes Group (rated the 13th biggest builder in Australia) – which alone put 1700 projects in jeopardy across multiple states.
Collectively these companies had billions of dollars of home construction projects in their pipelines.
This collapse is happening at a time when Australia faces a shortage of 106,300 new homes over the next five years, according to the National Housing and Investment Corporation, which warned the number of apartments and townhouses being built has fallen by about 40 per cent since the 2010s.
There are a number of reasons why residential construction companies have been going bankrupt.
From COVID shutdowns, extended periods of inclement weather and chronic supply chain issues to cashed-up infrastructure companies competing for construction labour, first home builder stimulus packages being wound back and the end of a prolonged cheap credit-fuelled surge.
Put simply, the industry has been at the centre of a perfect storm.
Dr Peter Swan, a professor in the School of Banking and Finance at UNSW Business School, said that a lot of the building in the residential construction industry takes place “off the plan” when a fixed price contract is signed along with the payment of a deposit.
“Covid lockdowns and hundreds of billions paid to people not to work caused supply shortages, both locally and overseas. Lax fiscal policies and massive printing of money by the RBA led to inflation. The cash rate has been raised from almost zero to over 4 per cent per annum,” he said.
“All of these changes have put pressure on builders financially, as has the decline in house prices, which has now levelled out and gone into reverse. Far fewer properties are being listed for sale.”
In its most recent Building Approvals report, the Australian Bureau of Statistics (ABS) found that in April 2023 (seasonally adjusted), total dwelling approvals fell by eight per cent, while private sector houses fell 3.8 per cent, private sector dwellings (excluding houses) fell 16.5 per cent and the value of new residential buildings fell 2.7 per cent.
These numbers are supported by the ABS Lending Indicators report, which found that the value of new borrower-accepted loans (seasonally adjusted) has fallen by 25.8 per cent for the year-to-date, with owner-occupier loans falling by 24.3 per cent and investor loans dropping by an even larger 28.6 per cent.
Dr Rob Nicholls, associate professor of regulation and governance in the School of Management and Governance at UNSW Business School, also noted that the cash flow risks associated with increases in material costs and shortages of labour are borne by the builder in the residential home building sector.
This is different from the commercial building sector where lenders typically require that material contracts are either fixed or hedged for the duration of the project.
“For a residential builder, increased material costs and longer than usual material delivery times stretch working capital requirements. Some builders cannot deal with this and collapse,” Nicholls said.
The collapse of such a high number of residential construction companies has had two major impacts, according to Nicholls, who also leads the UNSW Business School Regulatory Laboratory.
The first impact is a reluctance by consumers to build new houses because they recognise that they have the risk of construction delay and a builder insolvency risk. The second is that suppliers to the industry recognise the insolvency risk and seek payment terms that put further pressure on builders’ working capital,” he said.
“The impact is compounded by builders trying to manage multiple builds where the prepayment on one build may be used on another. The effect is that if the builder folds, multiple projects halt.”
To illustrate, the Housing Industry Association h
as found new home sales in the three months to May 2023 were more than 40 per cent lower than in the year before when interest rates started to increase, and 25 per cent lower than prior to the pandemic.
Furthermore, cancellations of new home sales also remain elevated at a rate of 25 per cent in the last quarter. This means, for every four new projects a builder is recording, a previous project is being cancelled.
Nicholls is conducting investigative research into consumer protection in the construction industry as part of a UNSW Business Insights Institute project with Tip Group, an ASX-listed financial institution focusing on transferring knowledge and wealth between generations.
If a superannuation fund goes into liquidation, members’ investments are protected, and if a bank goes bankrupt, customers’ deposits are protected, but if a homebuilder collapses, he said new homebuyers’ deposits are not protected.
“Our research focus will be to understand how to reduce systemic and systematic risk in residential construction by learning from financial and professional service regulation,” he said
The outcome of the research would be to propose a regulatory framework that will minimise risks for those looking to buy and build new homes.