Government must step in to save building sector – experts

Industry watchers warn of more building company collapses to come

Government must step in to save building sector – experts

Construction industry watchers are calling for governments to step in to prevent more builders from collapsing amid a perfect storm of labour woes and rising costs.

The calls came after Porter Davis Homes, Australia’s 12th-largest home builder, went into liquidation last week, the latest casualty in an industry that has seen multiple companies collapse over the last two years.

Porter Davis called in liquidators Grant Thornton on Friday, The Australian reported.

The collapse left 1,700 homes incomplete in Victoria and Queensland and reinforced industry fears that more construction companies will fail as costs continue to skyrocket and interest rates rise. Industry watchers also worry that the existing labour force can't handle the high volume of work – which is often done without a profit thanks to fixed-cost contracts and rising materials prices.

“Terrible” conditions

Scott Hutchinson, chairman of Hutchinson Builders, said conditions in the sector were “terrible.”

“It’s ridiculous,” he told The Australian. “I have never seen it like this. There will be more builders going broke.”

Hutchinson was sceptical that governments would be able to stanch the bleeding.

“There’s nothing governments can do,” he said. “People simply should not build. Governments will fill the gap with infrastructure spending, but I don’t think there should be any private building.”

Hutchinson Builders is the nation’s largest private builder and its third-largest residential builder with a focus solely on apartment construction, The Australian reported. Hutchinson said that while the company is protected by a strong balance sheet, it will make no money this year.

“What happened is a rush of work came in,” he told the publication. “Prices have gone up and there’s not the labour force to handle it. It’s completely overheated, especially on the Gold Coast, which we think may be heading for a crash.”

Phil Kearns, chief executive of land developer AVJennings, said the Reserve Bank’s 10 consecutive cash rate hikes had strangled the market, with buyer inquiries for new homes plummeting thanks to the uncertainty around interest rates. 

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“The RBA must live in a parallel universe, because we see from inquiry levels, right across the market, it’s killing the market off,” Kearns told The Australian.

Kearns said that “interest rate stabilisation” was necessary to help stabilise the industry, which he warned was in a fragile state.

“I think you’ll see more Porter Davises down the line, which is not good for anyone,” he said.

Calls for intervention

MAree Kilroy, senior economist at BIS Oxford Economics, said government intervention may be necessary to mitigate the economic fallout from builders collapsing.

“The overhang of fixed-price contracts signed when input prices were significantly lower and delays that are pushing out payment milestones continue to make it a difficult environment for builders,” she told The Australian.

Kilroy predicted that more firms would collapse as new home sales remained stifled.

“Both profitability and cash flow are being challenged, which is echoing through a rising rate of administrations that will continue this year,” she said.

Kilroy warned that the situation could worsen if governments don’t come to the industry’s aid.

“Previous downturns have triggered government stimulus, both at the federal and state level,” she told The Australian. “In part, backed by growing community concerns surrounding housing affordability, there is a growing prospect of government intervention this cycle, both to ensure that houses already on the books are completed and to patch over the slump in new sales that will hit ground level in 2024. Without such action, a steeper and more protracted downturn is a distinct possibility.”

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