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Construction industry crisis could collapse economy

Other companies are also in trouble. ASX-listed homebuilder simmons group Melbourne builder Denise Family Homes cut 10% of its staff this week in response to lower sales volumes, higher costs, trade shortages and a downturn in the market. Economists and housing industry experts warn more pain lies ahead.

The Porter Davis implosion is a remarkable case study of how the laws of supply and demand in an economy can collapse. The company went bankrupt despite the huge demand for the product.

It also highlights that government attempts to stimulate the economy can have unintended consequences.

The question of how bad the situation will be for the construction sector and, by extension, the national economy remains a thorny issue. Already struggling to manage public debt at historic levels, state and federal policymakers now watch with concern.

porter davis He sought help from the Victorian government. But on Thursday Prime Minister Daniel Andrews said it was not right to use public money to support a non-viable company.

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“If a bank refuses to support a business, that’s exactly where I think we shouldn’t intervene,” said Andrews. ‘s fundamentals were not strong.”

Still, the consequences of further failures can be severe.

The construction industry is directly responsible for around 7% of Australia’s GDP (by volume) and 9.5% of total employment. But its importance to the national economy goes far beyond that, especially given its psychological role in underpinning consumer and business trust.

Economist Saul Eslake says troubles in the construction industry are often the first warning that a boom period is coming to an end.

He said a sharp drop in housing construction marked the early stages of the recession in the early 1980s and 1990s, both preceded by periods of historically high interest rates.

“The construction sector is often the canary of the coal mine because it is very interest rate sensitive and construction activity is usually done with borrowed money more than anything I can think of,” Eslake says. .

“The economy will almost certainly slow down significantly. If not, that would be surprising given how quickly interest rates have risen.”

The construction industry occupies a unique position within the broader economy.

Brad Walters of credit bureau Equifax says that every dollar spent on building and construction costs three dollars across the broader economy.

“This is why, traditionally, the sector has helped so much economically. When it does well, the economy does well,” says Walters.

Is the inside out also true? If the construction industry suffers, will it have a very large negative impact?

Walters said Australia has a strong banking system, low unemployment, high export prices and household savings.

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“But in such an environment Population growthconcerns about housing and rent affordability, and we need more [housing] Given the inventory, the fact that the construction sector is under pressure is really worrying. “

Despite a nationwide housing shortage, industry signs have been worrying for months.

Back in May of last year, when the news comes out Economists and construction industry experts predicted another homebuilding giant, Metricon, is potentially at odds, predicting a “significant correction” in the construction sector.

That fix is ​​now apparently in progress. The number of housing projects approved by parliament peaked at over 23,000 in March 2021, from 13,000 in June 2020, according to figures from the Australian Bureau of Statistics.

Approvals plummeted to about 12,000 in January this year and are almost certain to fall further after the most aggressive rate tightening cycle in three decades continues to wash over the economy.

Lending collapsed. The number of mortgages issued by the bank and its smaller competitors to build or buy new homes peaked at 12,809 in February 2021, from 5,837 in June 2020, up this year. By February, it had dropped to just 4,267.

According to Australian Securities and Investments Commission statistics, there were 1,494 construction industry bankruptcies between 1 July and 19 March, nearly two of the 787 recorded in the same nine months last year. Double.

Craig Shepard, partner at bankruptcy specialist KordaMentha, said construction companies accounted for around 30% of Australia’s bankruptcies from the current financial year to date.

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He said that while parts of the commercial construction sector were booming, a large number of home builders were in trouble because they were working on very tight margins and fixed-price contracts.

“A perfect storm of bad luck. COVID has had a significant impact thinning the balance sheets of these builders. No,” says Shepard.

He predicts more bankruptcies among mass home builders and their subcontractors in the next 12 months.

“There will definitely be an impact of contagion … hopefully not too dramatic, not too widespread, but there will be an impact,” says Shepard. “A lot of our suppliers and subcontractors have been asking us, ‘What do we need to do to manage our cash flow?’”

The big question is what happens next. Economist Chris Richardson says the sector is experiencing “a lot of pain” and will get worse before it gets better. But he doesn’t think the situation is dire.

“What we often see is that builders have gone bankrupt so far, not because of interest rates, but because they made the wrong bet on what the costs would be,” Richardson said. increase. “It will settle before interest rates settle.”

Population growth is one of the big comforting factors for some in this sector.

In a recent report, the National Housing Finance and Investment Corporation, the agency responsible for increasing housing supply, warned. Reserve Bank’s Sudden and Unexpected Rate Hike Cycle Reduced supply of new housing.

We also expect a recovery from around the middle of the decade.this will still remain 106,300 housing shortage Five years until 2027.

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The trick is getting there for companies under pressure here and now.

Hutchinson Builders, Australia’s largest privately owned construction company, says its sector of the construction sector is suffering from significant financial pressure.

“Our industry is bleeding massively,” said team leader Bernie Nolan.

Nolan warned that more construction companies could go bankrupt in the next 12 months.

“The industry is deeply concerned about zombie companies that have beaten COVID with government support,” he says. “People rely on cash flow to sustain themselves, but at some point they realize there isn’t enough money in the bucket to pay everyone.”

Massive home builders were hit hardest, Nolan said, but the commercial sector was also affected.

Many construction companies struggled to find subcontractors because they were dealing with big government Infrastructure projects such as the Metro Tunnel, North East Link, and Victoria’s Big Build.

“This is a big problem because it robs you of deals, which greatly reduces your ability to build things quickly,” says Nolan.

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In addition to the sharp rise in material prices, the labor shortage is becoming more serious. russian ukrainian war.

“I know a lot of companies that are now buying sand quarries so that they can guarantee that they can supply their own concrete,” says Nolan. “And once the quarries are in private hands, the price will only go up because there are fewer quarries available for suppliers to buy.”

Matthew Candelers, chief executive officer of the Australian Urban Development Institute’s Victoria branch, says it will take time to resolve the challenges of the past few years.

He agrees with predictions that the industry’s medium-term fundamentals are positive and the need for new housing is stronger than ever.

“It’s an incredibly difficult time for all of us,” says Canderers. “Labor and material costs have increased exponentially over the past few years, and there has been a significant overall cost increase that is pouring into the industry.”

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For now, Blackshaw says, large animals are still being digested by snakes.

He thinks some of the more alarmist forecasts are misplaced, suggesting the sector will start shrugging off its predicament from the middle of this year.

And the Reserve Bank’s decision to suspend the official cash rate this month was a good sign after 10 straight rate hikes.

“The industry has weathered the worst and is doing well,” says Blackshaw. “We have been building profitable contracts for some time.

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