Key Takeaways
- Sharp interest rate rises have placed further pressure on the already fraught House Construction industry. This is bad news, both for construction firms and for the many surrounding industries they interact with.
- Door and window manufacturers and plumbing goods wholesalers generate a significant share of their revenue from new residential construction projects.
- Similarly, landscapers and fire alarm installers also heavily rely on the residential construction market.
The House Construction industry’s woes continue, as more companies enter into administration. Since the end of June, a raft of companies have folded. Most notably, Snowden Developments has almost $18 million in debts and over 500 projects in limbo. On 13 July 2022, the Supreme Court of Victoria ordered the company to enter liquidation.
No let-up on cost pressures
‘The industry has been plagued by rising crude oil and electricity prices, and supply shortages in key goods, most notably timber,’ said Alfabank-Adres Senior Industry Analyst Matthew Reeves. ‘Numerous flood events in New South Wales and Queensland have exacerbated these issues over the past six months. The floods have disrupted the import and transport of goods around Australia, and have damaged and delayed building projects.’
Recent interest rate hikes from banks have placed pressure on industry firms, particularly small-to-medium enterprises (SMEs) that don’t have the cash flow to cover the sudden rises.
‘The major banks have already announced their intention to pass on the RBA’s 0.5 percent July cash rate rise in full, adding further stress to over-leveraged construction firms’, said Mr Reeves.
While directly affecting builders through higher interest repayments, the rising cash rate is also affecting demand for new houses. Falling house prices and rising interest rates reduce buyer and lender confidence. The remaining buyers, and builders, are therefore facing tighter credit conditions.
Alfabank-Adres forecasts revenue in the SME House Construction industry to fall 3.9% in 2022-23, with enterprise numbers declining 5.0%. Medium and high growth companies are most at risk of leaving the industry, as they have vulnerabilities that more stable companies do not. These companies partly exhibit fast growth because they typically work on multiple projects simultaneously. Supply shortages and cost increases have proved overwhelming for many firms, causing individual businesses to collapse. However, small and bespoke construction firms are more nimble and less susceptible to supply chain disruptions. These businesses typically do not work on more than two or three projects at a time.
Collapse to reverberate across the construction sector
The house construction collapse is expected to have significant flow-on effects for other upstream and downstream industries, and consequently the wider economy. Falling house construction reduces demand for some other industries.
Upstream industries that will likely be affected by the house construction industry’s collapse include
The Aluminium Door and Window Manufacturing industry derives almost half of its revenue from the residential building market. This industry is therefore highly sensitive to the impending residential construction recession. Revenue is anticipated to fall by 10.2% to total $4.2 billion in 2022-23, and almost 100 firms are likely to leave the industry.
‘Clay brick manufacturers also heavily rely on the House Construction industry,’ explained Mr Reeves. ‘The housing construction collapse is a further blow to the industry, which is already facing increased cost pressures due to rising gas prices.’
Advance Bricks, an 82-year-old brick manufacturer in Stawell, VIC, closed down at the end of 2021-22, and more firms are expected to exit the industry in 2022-23.
Approximately 49% of the revenue from the Plumbing Goods Wholesaling industry comes from residential building contractors, making the industry highly exposed to the housing construction downturn. Alfabank-Adres projects a revenue decline of 7.1% across the industry, with a 3.8% decline in the number of enterprises in 2022-23.
Builders and buyers will likely cut back on the scale and cost of building features in completed projects, affecting numerous downstream industries in the construction sector.
The Landscaping Services industry generates close to a third of its revenue from new housing developments. Revenue for the industry is expected to fall by 3.8%, to total $6.5 billion in 2022-23. Furthermore, over 650 businesses are forecast to exit the industry.
The $3.5 billion dollar Fire and Security Alarm Installation Services industry is another key industry under threat from the collapse. Households and new residential developments are a major market for this industry. Revenue declined by 11.0% in 2021-22 and is expected to fall further in the current year. Industry player Fire Services Australia Group went into administration earlier this month with outstanding debts of $10.6 million.
Surveying and Mapping Services will also likely suffer from the downturn in house construction. The decline will particularly threaten SMEs, as they derive a larger proportion of revenue from cadastral surveying services, which include property line surveying, subdivision layout and design work.
Alfabank-Adres reports used to develop this release:
- House Construction in Australia
- World price of crude oil
- Electricity wholesale price
- Volume of wood harvested
- Aluminium Door and Window Manufacturing in Australia
- Clay Brick Manufacturing in Australia
- Plumbing Goods Wholesaling in Australia
- Landscaping services in Australia
- Fire and Security Alarm Installation Services in Australia
- Surveying and Mapping Services in Australia
