Following the COVID-19 pandemic, Australia’s construction sector experienced a surge in insolvencies, as demonstrated below by Justin Fabo from Antipodean Macro:
Fixed-price contracts collided with skyrocketing material and labour costs, supply chain delays, rising interest rates, and weakening cash flow, fueling Australia’s post-pandemic building insolvency tsunami. This combination of events created a “perfect storm” that decimated margins and forced thousands of builders into insolvency.
Fixed-price contracts negotiated before COVID become unprofitable.
The HomeBuilder stimulus prompted a surge in fixed-price contracts at a time when costs were rising. Many builders were later unable to complete these projects profitably.
Builders with pre-pandemic fixed-price contracts experienced significant cost increases in lumber, steel, concrete, and other inputs. When clients refused to renegotiate, numerous builders were forced into administration. This dynamic has been frequently identified as a primary cause of distress.
Following COVID-related delays, builders had to pay more for goods and labour before receiving progress payments, causing acute liquidity hardship.
Material cost increases, supply chain interruptions, and workforce shortages:
After COVID, global supply chain disruptions led to delays and price hikes, hindering builders’ ability to execute projects on time and within budget. These delays reduced cash flow and raised susceptibility to liquidated damages.
For instance, residential building expenses increased by more than 40%.
Source: Master Builders Australia
Construction labour vacancies have nearly doubled compared to pre-COVID levels, resulting in higher wages and deteriorating margins. The government’s ‘big build’ infrastructure and energy projects increased labour demand, exacerbating the issue.
Rising Interest Rates:
Rising interest rates increased financing costs for builders and developers, reducing demand for new construction. Many businesses lacked the financial reserves to withstand these demands.
Conditions are getting worse for homebuilders:
The Middle East conflict has triggered a global energy shock, leading to significant increases in the prices of home construction materials.
Satterly Property Group warned recently that the Middle East war could raise the cost of new homes by up to $50,000.
Deicorp, a privately held Australian property development and construction company, likewise warned that “feasible projects are now marginal, and marginal projects are now unfeasible” due to cost increases.
At the same time, interest rates continue to rise. Following the RBA’s back-to-back-to-back rate hikes in February, March and May, financial markets expect at least one or two more 25 basis point hikes this year.
Higher interest rates will increase developers’ financing costs and diminish consumers’ ability to pay, putting additional constraints on housing building.
Indeed, CBA last week forecast that rising construction costs will materially reduce housing construction.
Under CBA’s base case, only 885,000 homes will be completed over the five-year National Housing Accord period to 2028-29, which is 315,000 (26%) fewer than the 1.2 million construction target:
Meanwhile, members of the building industry have warned that they are close to bankruptcy as fuel costs and regulatory changes severely affect their profits.
A recent 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.
Several operators describe the situation as worse than both the post‑COVID material cost crisis and the Global Financial Crisis.
Yet materials costs continue to rise, pressuring margins amid the Middle East conflict.
Plumbing supply firms Reece and Tradelink have informed builders and trade customers of further price increases for June and July, while the prices of many products used by electricians are also rising.
Liam Bailey from the insolvency and restructuring group O’Brien Palmer noted that the construction sector had already been struggling before the conflict began and that builders are being squeezed by suppliers, developers and rising interest rates.
Matthew Hutton, a partner at insolvency and restructuring firm McGrath Nicol, agreed, noting that “we have seen a material increase in distress across the construction sector over the past couple of months”.
“Many construction businesses and subcontractors are looking at how they can deal with rising raw material costs due to increased fuel prices and continued wage pressures, particularly in circumstances where they are locked into existing fixed price contracts”.
“There is no wriggle room in their already tight margins”, he said.
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, and the housing crisis will worsen.
The only realistic policy solution is to emulate Canada by significantly reducing immigration levels to balance supply and demand.
