While a lot has improved over the past 12 months, plenty of concerns continue to frustrate the construction industry.
A year back, as we entered Spring, Bowens, Timbertruss and builders were hoping for relief from critical delays, largely influenced by our population’s adherence to health protocols. Building site activity was suffering from a lack of rhythm, exacerbated by the need to track down additional volumes of scaffolding, timber, windows, structural steel, plasterboard and truck drivers. World shipping was in turmoil, the delays were unfathomable. And then … President Vladimir rolled into President Zolensky’s eastern territories. Fast forward to the recent Christmas break and most would say our concerns had moderated. In some instances this remains true, while for others the cruel reality of ongoing delays, leading to extended build times, continues to take a toll.
As it is in the early months of every year, too many conversations are spent querying, estimating and guessing about the months ahead, with few facts to back our opinions. “There’s enough work to take us through to 2024 … Job starts will fall off a cliff midyear … Sales of new homes are down 80 per cent but they have enough in the bin until November.” For a long time my brother has suggested we (Bowens & Timbertruss) should be hawking our numbers and observations to industry Economists. Sales, debtor movement, big builders, small to medium builders, geographic delivery areas, cost movements, the slow return of trades from their summer break, more prefab or less, new home builds or renovations … we have a good view of it all. Let me share a sample size, without giving too much away.
The most significant development I have noted in the first weeks of 2023 has been the increased volume of builders struggling to meet their payment commitments. Of course, the details for every situation differ, yet it is a reality many large builders are struggling through a desperately difficult period. Our read on ‘small to medium’ accounts is not as dire, although many are experiencing the same worries.
“The most significant development I have noted in the first weeks of 2023 has been the increased volume of builders struggling to meet their payment commitments.”
Some of the industry’s most notable building identities have told me they have never seen it so tough. With fixed price contracts, extended build times and unprecedented price increases, the head winds have got the better of many. Seemingly, the Christmas break did little to ease the pressure. The phrase I have heard most often in the New Year goes something like this, “Trades remain hard to pin down” (the language is rarely so genteel). From the people I have been speaking with, the stories are remarkably similar. A house that took 200 days to build in February 2020 now requires over 300 days to complete. These and many other challenges inevitably lead to a cycle of unprofitable returns. Eventually balance sheets are tested and re-capitalisation is unavoidable. These are grim times indeed.
Like many suppliers across the industry, Bowens and Timbertruss insure their debtor book. And with the tighter market, limits have been very difficult to manage. Added to the equation, a dramatic increase in material costs over the past two years has seen less being sold for more. The pressure has been magnified by changes made in March 2020, when insurers cut back their exposure without warning. While work has been done to correct many of the reductions, others remain less than optimal. Just another point of tension to manage.
From what we can see, very few builders are selling enough jobs to match what they have under construction – pipelines are reducing, quickly. One of our longer-term customers sold 105 homes in Jan/Feb 2022, for the same period this year they took 31 deposits and accepted 22 cancellations. There are many examples I could draw upon.
“One of our longer-term customers sold 105 homes in Jan/Feb 2022, for the same period this year they took 31 deposits and accepted 22 cancellations.”
For some of the big guys, site starts will drop by more than 40 per cent from 1 June. For others, the fall will be more severe. That said, there are plenty who say they have enough work to ensure solid monthly activity will continue well into 2024; again, on this score, our smaller accounts appear to be in a better space. Unsurprisingly, interest rate pressure and higher build costs are leading to a tighter lending market for borrowers. The growing value of a new home deposit is also playing a part.
Despite the difficulties, I believe there are genuine reasons for hope. For those who are doing it tough, I encourage you to persist.
Immigration is back and the people coming to Australia need to be housed. A report from JLL in February revealed just 8,378 apartments were completed across the mainland state capitals in 2022, compared with 15,159 in the previous calendar year. Ten years ago this number hovered around 30,000. Underlying demand for new dwellings remains healthy, while the price of rentals continue to climb.
The various impediments caused by poor supplier inventories last year have mostly dissipated; thank goodness. And margins for new builds are typically very good, although until construction times reduce much of this gain will be nullified. Those who have employed a ‘cost-plus’ model continue to enjoy the benefits.
For some time now Victoria’s unemployment number suggests we are at full employment, quite a change from the difficult economic periods of the past. 8-11 per cent was the norm through the 1990’s, while after the GFC unemployment rose nearly 2 points from a base well above what we are experiencing today.
“For some time now Victoria’s unemployment number suggests we are at full employment, quite a change from the difficult economic periods of the past.”
While inflation has been an issue, it is past its peak. Tourism is reopening and China has shown signs of being more cordial with Aussie exporters; a case can be made for employment creation to continue. Our migrants will find jobs and our economy will benefit from the additional tax revenue.
In most years, we tend to have a reasonable feel for what lies ahead. In 2023, I am struggling. I have enormous empathy for the builders of Victoria, particularly. No sound mind could have predicted the speedy confluence of so many travails. Even so, the majority are doing an almighty job to survive and there is reason for optimism. If you are finding it tough, hang in there. It will get better.