- Construction firms make up around 30% of all insolvencies in Australia
- On average, detached homes are over 12 weeks being schedule
- 25% of the largest 200 builders recorded an operating loss in the year to March 2022
The Reserve Bank of Australia (RBA) has warned that more insolvencies are likely in the home building industry as builders struggle to cope with escalating prices.
Construction cost inflation and higher labour costs have diminished profits on existing fixed-price contracts, leading to large residential construction firms entering insolvencies.
The findings, from the RBA’s latest Financial Stability Review, noted that construction firms account for around 30% of all insolvencies nationally.
“While the direct implications for the financial system are limited because banks have very small exposures to builders, there is potential for financial stress to spread to other businesses within the broader construction industry and to some households,” the report noted.
The warning comes as the cash rate was raised by 25 basis points to 2.60% recently.
Businesses often provide home building contracts at a set price with significant lead time, leading many builders venerable to material and labour price rises since 2021.
Many builders are already losing money on some contracts.
Currently, construction delays for detached houses are around 12 weeks on average. Builders have responded by boosting rates on new contracts, including decreasing the period before accepting a quote, and renegotiating some of their current contracts.
However, both medium-sized and large builders are recording negative net operating cash flows.
“The likelihood of having persistently weak cash flows over the year has also increased, including for large builders whose size may have given them some advantages in managing the ongoing disruptions,” the report said.
“Over 25 per cent of the largest 200 builders recorded an operating loss in the year to March 2022, up from a little over 15 per cent a year prior.”
The RBA notes some builders are running down cash reserves thanks to operational losses. The latest available data from June 2022 shows builder’s liquidity buffers were around less than three months of turnover
