Home builders and investors whether big or small need to be wary of the continuing fragility of the construction industry, says author and financial and housing market analyst Pete Wargent.
Wargent is a co-founder of BuyersBuyers, a purchasing agency for property buyers. He's also a chartered accountant and a former director at Deloittes.
He says while property prices are high and there is great demand for residential sales, buyers need to be aware the building industry is not in a healthy state at present.
"For construction, there'll be a lot more insolvencies to come," Wargent says.
"In Queensland they have a saying: 'There's never just one cockroach', and it's a bit like that in construction, you do get a domino effect. Even just the lack of confidence in the sector can itself see companies get the rug pulled on them.
"A lot of projects are built on fixed price contracts. And now with a shortage of materials and labour it's very, very difficult for a lot of these businesses to complete projects profitably."
In Ballarat, Victoria, the smaller homebuilder needs to be careful to choose carefully when looking at a project, Wargent says, with even half or three-quarter completed projects facing the possibility of being left unfinished, as has happened with the collapse of Goldfields Building Co and LTR Constructions recently. Building insurance is a key, Wargent says.
"That's a hot topic at the moment, especially in Queensland, where we have some quite severe flooding; people do need to make sure they're well covered," he says.
"You can see a lot of people started major renovations and can't finish them, because they can't afford the materials, or access them, or they can't afford the labour. Normally, when you put stimulus into people's pockets, in Australia it's spent it on overseas holidays and new cars. But people haven't been able to go on overseas holidays, and new cars are tricky because of the shift to electronic vehicles. So huge amounts went into major renovations and buying property.
"People just decided to upgrade and renovate or add extra space on their homes. But you can see, all around the country, a lot of those renovations aren't being completed, because of the cost; it's become unreasonable for people to get work finished. Given the domino effect of construction firms going to the wall, it seems increasingly likely that many higher-density projects will not be completed on a timely basis."
The number of construction insolvencies has been fewer since the beginning of the pandemic, a fact confirmed by ASIC. It's only logical the numbers will rise as the sector begins to seek to restart, Wargent says.
"If you look at the graph, we've had about nominally abnormally low number of insolvencies for two years. So you'd expect some catch up. It's a confluence of factors, really; it's a very cyclical industry. That is the nature of the beast in insolvencies; you typically see a fair number in the industry, and then their businesses are reborn in another guise, that's not unusual."
"Recently, we have seen Probuild head into administration, while Condev and Privium have also stumbled into liquidation, leaving many live projects unfinished and contractors out of work. In Perth, New Sensation Homes and Home Innovation builders are among the latest casualties within the past week.
"The construction sector is one of the most important industries in the country, with over 1.15 million employees directly engaged in the sector, so this is a cornerstone of the Australian economy."
In Australia, the crisis in supply of materials and labour has been exacerbated by 30-plus years of globalisation, decimating local industry and leading to a shortage of skilled workers. Home builders are now paying the price for that philosophy, Wargent says. The manufacturing industry in Australia has languished due to government policies, either Liberal or Labor.
"It's very, very common for countries to import not only materials, but also labour and services and so on," he says.
"I think there are factors on both sides. On the on the supply side, it's been very difficult to ship freight around the world at a reasonable cost for quite some time. On the other side the government did tip a hell of a lot of stimulus into construction through the pandemic with the homebuilder stimulus. If you look at dwellings under construction, there's still over 100,000 detached houses under construction around the country.
"The previous cycle was very focused on high-rise apartments in Sydney and Melbourne and Brisbane. But with the home builders' stimulus, it's all over the place. Regional Australia, all of the capitals; there's never been as many houses under construction as now.
"So there's a lot of demand just at the same time when when supply has been choked all around the world. Bringing those two things together, it's just created a real shortage. A lot of the supply chains are just being choked out by all of the disruption over the past two years."
"What's really been accentuated over the last couple of months is obviously, with what's going on in Ukraine, Russia has been sanctioned out of the market for energy. Now there's about 40 per cent of China's population under lockdown.
"That disruption is only going to prolong these supply issues. The longer it goes on, the more likely we are to see interest rates rising, potentially quite sharply in America, and the rest of the world tends to follow. That tends to have a knock-on impacts for things like construction; people get more wary about building and borrowing because the cost of money is going up."
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