Since the end of 2021, the list of construction companies collapsing has been growing at an alarming rate. Building giant Probuild went into liquidation in February, local Gold Coast brand Condev followed in March, and even Australia’s largest home builder, Metricon, was on the ropes before securing $30 million cash mid-year.
Construction insolvencies rose to their highest level in nearly three years in the June quarter as the Australian Taxation Office resumed debt collection efforts after pausing aggressive enforcement in states affected by the pandemic-related lockdowns.
Unprecedented market conditions mean the construction sector is facing something of a perfect storm. COVID-19 saw record government investment in infrastructure projects but also caused significant disruption and delays to build projects.
Broken supply chains, soaring shipping costs and the rocketing price of building materials and labour are just some of the factors that have put the Australian building industry’s already slim profit margins under huge pressure.
In this blog, we explore some drivers of the profitless boom impacting Australia’s construction sector.
1. A cooling housing market
The housing market has cooled dramatically in 2022 following years of strong growth. Interest rates have risen faster than ever before – from 0.1% at the start of the year to 2.85% this month – with more increases to come. Inflation is also spiking, with the cost of living at a 21-year high and consumer confidence falling rapidly.
In September, Master Builders Australia (MBA) downgraded their forecasts for the residential construction sector to reflect the expected impact of these pressures. The MBA now expects new home construction to fall below the pace of population growth until 2024 before lifting again from 2025.
2. An increase in the cost of raw materials
The cost of key construction materials such as steel and timber has jumped by around 40% over the last 12 months. CoreLogic’s Cordell Construction Cost Index (CCCI) found that overall residential construction costs rose by 11% during the year to September.
This is an enormous increase for the sector and a particularly challenging issue for builders who signed fixed-price contracts with customers but hadn’t locked in costs with suppliers. While larger operators can generally negotiate better pricing in an environment where costs are spiking, smaller players are usually disadvantaged.
3. Soaring shipping costs and supply chain constraints
Shipping costs rose an incredible 300% from 2000 to 2022. While the price of international shipping has decreased slightly from record highs in recent months, construction companies of all sizes are still facing an operating environment where the landed cost of construction materials is higher than ever.
Shipping costs aside, disrupted global supply chains were starting to return to normality when Russia’s invasion of Ukraine earlier this year caused a new round of upheaval. The sanctions imposed have restricted the flow of energy and vital raw construction materials, including steel.
4. A critical shortage of skilled construction workers
The 2022 Arcadis Construction Costs Index Report found that Australian construction vacancies have risen by 80% since late 2019. With a prediction that 100,000 roles will be unfilled in 2023, construction workers can command higher wages and be more selective about their employers. The Arcadis report identified skills and labour shortages as the defining issue for the Australian construction sector over the next decade.
Close to home, CoreLogic’s Q3 CCCI report found that Queensland construction costs rose by 5.8% during the September quarter, the highest quarterly increase of any state and well up on June’s figure of 2.3%.
It’s clear that the challenges the construction sector is facing will be with us for the foreseeable future. The Australian Financial Review predicts that higher building costs will be a permanent feature of the local landscape, with material and labour shortages likely to be ongoing issues.
At Regal Crane Hire, we continue to work with our customers to support the ongoing profitability and success of their businesses and ours during these challenging times.