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On March 31, two of the leading construction firms collapsed in Australia, joining a list of businesses that have gone into voluntary administration over the last 12 months. The series of collapses in the Australian construction market has left the industry in crisis just as the country faces a looming housing shortage.
These two firms, combined, have left more than 1,700 developments in jeopardy. Furthermore, several hundreds of jobs were sacked, while thousands more workers employed by suppliers and subcontractors are expected to be hit financially in the short term. This has sent shockwaves throughout the Australian construction sector, which has been reeling under the pressure of rising inflation and a high-interest rate environment.
Rising input costs, labor shortages, supply chain delays, and dropping demand have significantly contributed to the collapse of Porter Davis Homes. With the firm exhausting all options to secure further funding, the directors were forced to place the companies into liquidation. At the time of this announcement, the firm is projected to owe money to over 2,000 creditors.
The liquidation proceedings of these two firms follow many closures over the last 12 months, in both residential as well as commercial construction sectors. House builders such as Snowdown Developments, Langford Jones Homes, Pivotal Homes, Waterford Homes, and Solido Builders, among many others, have announced bankruptcies in 2022. Probuild and Condev, which was having construction projects worth billions of dollars, also entered into liquidation in 2022.
The collapse of these residential and commercial construction firms is a product of the deepening global crisis. The various Covid-19 related policies adopted by government institutions worldwide have resulted in major labor shortages and supply chain disruptions. This has subsequently resulted in higher building material prices in 2022. The ongoing war between Russia and Ukraine has further pushed energy and commodity prices, creating a further impact on the margins of these firms.
In addition to rising inflation, the subsequent interest rate hikes announced by the Australian central bank have further squeezed the margins of construction firms, who entered into fixed-price contracts with no possible way to pass on the cost increases to buyers. These economic challenges and the subsequent fall of residential construction providers mean that the housing crisis is poised to further deepen in the Australian market.
The huge demand-supply gap also means that the prices are poised to grow significantly over the next five years. In the short term, the interest rate hikes mean that borrowing cost for consumers has already increased significantly, making home buying unaffordable for many across Australia. All of these factors, coupled with the downfall of Porter Davis Homes, have intensified the fear of a looming housing crunch in Australia in 2023.
From the short to medium-term perspective, ConsTrack360 expects further strain on residential and commercial builders in Australia, owing to the policies adopted by the government during the pandemic outbreak. Changes in the national construction code, which is slated to come into effect in October 2023, will also add to construction costs for builders and developers.
Under the new construction code, all of the housing units in Australia are required to achieve a seven-star energy efficiency rating, starting October 2023. Furthermore, developers are also required to meet new accessibility standards, including easier access to bathrooms and step-free entries. The additional cost pressure, coupled with the growing fear of recession in H2 2023, means that the construction sector can see further collapses in Australia over the next few quarters. This will not only affect the residential construction sector but will also have a broader impact on the growth of the overall construction market in Australia.
