Supply chain issues and insolvency problems have unraveled the construction industry in Australia as billion-dollar developers are facing liquidation and rattling the nation’s economy in what’s been called “a construction sector bloodbath.”
16 Australian builders liquidated their assets and closed up shop in the last quarter of 2021, and others have followed. Caydon, Metricon, Condev, and dozens of other home developers throughout Australia are facing a combination of financial stresses due to overleverage as well as supply chain issues exacerbated by the COVID-19 pandemic.
As early as October 2021, the Association of Professional Builders (APB) reported that “It was clear that the increasing price of construction materials, supply chain delays and COVID-related labour shortages were impacting the profitability of every single building company in Australia.”
The Australian Bureau of Statistics (ABS) has confirmed this contraction of the nation’s construction sector as residential buildings value fell by 20.2% in April 2022. From January to April, the amount of value in these residential buildings fell from $22.7 billion to $20.1 billion, which accounts for 11.6% of the total Year Over Year (YoY) fall from 20.2%. Additionally, industry market researcher IBISWorld projected that the total number of firms operating in the home building industry would fall by 9% in 2022-23.
Home builder collapses leave developments on the line
Several Australian builders are struggling or have outright folded, with “billions of dollars” of projects either on the books or currently underway:
- Australian giant Condev has hired a liquidator after failing to receive a $25 million cash injection
- Last month, Snowdon Developments was ordered by the Australian Supreme Court to go into liquidation — owing about $18 million to 250 creditors
- Waterford Homes liquidated in June with debts exceeding $600,000
- Probuild closed shop in February 2022, as it couldn’t maintain $5 billion worth of housing projects across three Australian states
- Australia’s largest home builder, Metricon, has 4,000 homes still in development as of July 2022 and is still struggling even after a $30 million capital injection in order to stay solvent
- Parts of the Caydon group are facing liquidation as of July, leaving Caydon to liquidate 130 unsold apartments that range from $600,000–$700,000, as well as offloading a land bank in a Melbourne suburb was going to be a $1 billion commercial project
- Small home builder Affordable Modular Homes has collapsed, owing $121,000 to creditors
- Statement Builders has gone out of business leaving $200,000 in unpaid taxes
- Langford Jones Homes, Pivotal Homes, Solido Builders, Westernport Constructions, and Wulfrun Construction have all collapsed just within the last six weeks
- Since the close of 2021, other Australian builders who have collapsed include ABD Group, ABG Group, BA Murphy, Dyldam Developments, Home Innovation, Hotondo Homes, New Sensation Homes, and Pindan
Additionally, A developer in Perth had to stop work on a $165 million dollar luxury tower just before Caydon’s collapse, and this developer must return all deposits to the buyers who bought 50% of the planned apartments.
“Pressure on construction costs resulting in builder insolvencies and supply chain interruptions, and now the interest rate pressures, and negative house price sentiment has placed additional pressure on our operations,” said Caydon Managing Director Joe Russo, echoing the sentiments of many other builders.
While the Construction Forestry Maritime Mining and Energy Union (CFMMEU) worked with many builders like Caydon, Condev, and Probuild to negotiate with the government and keep workers working, this resulted in backlash as many construction workers voiced complaints about how they were forced to work during the pandemic.
It’s hard to say exactly how many construction jobs have been lost — many of these companies kept a small permanent workforce but hired the rest of their workers via labor hire companies, and used independent trade-persons and subcontractors.
Multiple economic, global factors at play
One of the biggest factors holding up residential construction is lumber supply chain disruptions caused by the COVID-19 pandemic. Australia depends on Shanghai for a lot of its timber: A quarter of the nation’s goods are imported from Shanghai, including 60% of all timber.
Slowdowns and strict inter-trade guidelines are not the only factors that became more complex during the pandemic: Fixed-price contracts are also hurting many developers’ abilities to purchase timber and hire workers whose costs have accelerated beyond what these contracts dictate. It’s now taking 46 weeks on average to receive timber from Shanghai to Australia.
Plus, the U.S. isn’t the only country feeling the effects of rapid inflation: The Reserve Bank of Australia also predicts that inflation will rise from its current rate of 5% to 7% by the end of 2022. This only creates added pressure on these home developers who cannot pay for materials or labor to finish these homes.
Yet another factor that will complicate Australia’s recovery from this crisis is the actions of one of its key construction unions, the aforementioned CFMMEU. During the pandemic, they and other trade organizations fought to exempt the sector from COVID-19 guidelines as well as keep various labor agreements intact — which, while keeping jobs, received backlash over the safety of workers who continued to stay on the job during the pandemic.
All of these factors have contributed to the World Economic Forum releasing five recommendations to fight rising costs and reduced housing supply, meant to relieve some of the pressure on markets like Australia. They include upzoning, less strict immigration policies, more financial incentives to stimulate supply and demand, increased use of pedestrian-only zones in major cities, and finally more mortgages for homebuyers.
Each of these is designed to have more workers available as well as more capital to buy materials. Pedestrian zones can help create more commercial space to rent out, while more mortgages will give developers a new audience to market themselves to.