Australia braces for a new wave of construction insolvencies

Australia’s construction sector experienced a wave of construction insolvencies following the COVID-19 pandemic, as illustrated below by Justin Fabo from Antipodean Macro:

Australia’s post-pandemic construction insolvency wave was driven primarily by fixed-price contracts colliding with soaring material and labour costs, supply chain delays, rising interest rates, and weakened cash flow. This combination of factors was a “perfect storm” that wiped out margins and pushed thousands of builders into administration.

Fixed‑price contracts signed before COVID became unprofitable:

The HomeBuilder program encouraged a surge of fixed‑price contracts at a time when costs were about to spike. Many builders later found themselves unable to deliver these projects profitably.

Builders locked into pre‑pandemic fixed‑price contracts suddenly faced massive cost escalations in timber, steel, concrete, and other inputs. When clients refused to renegotiate, many firms were pushed directly into administration. This dynamic is repeatedly cited as a central cause of collapse.

Post-COVID delays also meant builders paid more for materials and labour before receiving progress payments, causing severe liquidity stress.

Material cost inflation, supply‑chain disruptions, and labour shortages:

Global supply‑chain breakdowns after COVID caused delays and price spikes, leaving builders unable to complete projects on time or within budget. These delays choked cash flow and increased exposure to liquidated damages.

In particular, residential building costs rose by more than 40%:

Source: Master Builders Australia

Labour vacancies in the construction sector nearly doubled compared to pre‑COVID levels, driving up wages and further eroding margins. The situation was made worse by the increased demand for labour arising from the government’s ‘big build’ infrastructure and energy projects.

Rising interest rates:

Rising interest rates increased financing costs for builders and developers and cooled demand for new builds. Many firms lacked the financial buffers to absorb these pressures.

Brace for a new wave of insolvencies:

The war in the Middle East has triggered a global energy shock that has already materially increased the prices of inputs used in residential construction.

Satterly Property Group warned that the cost of new houses could increase by up to $50,000 due to the war in the Middle East.

Deicorp, a privately owned Australian property development and construction group, also warned that “feasible projects are now marginal, and marginal projects are now unfeasible” due to the rise in costs.

At the same time, interest rates are rising. After the RBA delivered back-to-back rate hikes in February and March, financial markets are predicting at least two more 25 bp rate hikes this year.

Higher interest rates will increase financing costs for developers and reduce buyers’ capacity to pay, thereby acting as another constraint on housing construction.

Building industry members have revealed they are close to bailing out as fuel costs and regulatory change hammer their profitability.

A new Master Builders Victoria (MBV) survey revealed that 63% of members are locked into fixed‑price contracts, which prevent builders from passing on fuel and material cost spikes, and are pushing many towards staff cuts or exiting the industry entirely.

Victorian builders have reported sharp increases in fuel (especially diesel), plumbing, concrete, steel, and electrical supplies; as well as insurance premiums, rent, wages, and tip fees.

Almost half of the surveyed builders say project costs have risen by 6–10%, and one in five report increases of 11% or more.

Several operators describe the situation as worse than both the post‑COVID material cost crisis and the Global Financial Crisis.

“You just feel like you wake up every morning and you wonder if it’s Mike Tyson or Muhammad Ali who is going to whack you today”, Foundation Technologies Australia business manager Steve Hassett said.

“Because of everything in our sector at the moment, this is more challenging than Covid”.

Hassett says his firm reported $20,000–$30,000 in extra costs since the Middle East conflict–driven fuel spikes.

A demolition firm, Inside and Out Demolitions, has absorbed $20,000 in unexpected diesel costs and is considering shutting down after 30 years.

As a result, many builders are “treading water”, working long hours, and are unable to recover costs from clients.

The economic reality is that the housing supply curve continues to shift left, meaning fewer homes will be built and they will cost more.

As a result, the Albanese government’s 1.2 million housing target, already tracking 27% below its required run rate, will inevitably lag further behind.

Therefore, Australia’s housing crisis is bound to worsen further.