The ‘Perfect storm’ being faced by the Australian Building Industry

Australian Building Industry

An article written by Managing Director, Joe Caprara.

Australia’s biggest building companies continue to topple amid what appears to be a “perfect storm” which continues to brew and can’t be stopped.

As an introduction and by way of putting things into perspective,  it’s estimated that the cost of building a new residential home in Australia has increased by as much as 23% in the last two years alone according the articles I’ve read.

Builders nationally have been affected by the supply of materials issues since the beginning of the Covid pandemic. But this has now been further acerbated by Australia’s trade sanctions and tariffs of 35% against Russia following its invasion of Ukraine.

While Australia does not generally get a lot of timber from Russia, it does rely on Russia for the supply of between 49-50% on engineered Laminated Veneered Lumber (LVL) commonly used in the construction industry.

Whilst lobby groups warned the government against trade sanctions with Russia, the sanctions were understandable given the circumstances. And as the situation worsens we could even start to see a reduction of employment across the supply chain.

The collapse of Probuild happened in February which was actually prior to materials cost increases resulting from these Russian sanctions. Since then Condev in Qld followed suit and now Metricon is also experiencing financial difficulties.

Is this the last?…….I don’t think so.

In fact predictions are that between 20-30% of small businesses could be in liquidation within the next 2-3 years. And as you can appreciate these issues have placed additional strain on businesses in an already challenging environment.

So why the ‘Perfect Storm’?

  • Initially Covid caused a slowed down of building activities.
  • Then material importation slowed.
  • Covid traveling restrictions resulted in people saving money which then stimulated the renovations market.
  • To then add fuel to the fire the government then introduced a stimulus package to help the economy.
  • More public infrastructure works were approved.
  • Trade sanctions introduced on Russian imports.

This has further increased demand on materials and here we now have the Perfect Storm about to cascade in front of our eyes.

The price of raw materials like timber and reinforcing steel for example have increased by as much as 100 per cent in the last 12 months. And whilst price have been rising monthly, there are some signs that these increases may be starting too slow.

Unfortunately these issues are partly due to Australia’s heavy reliance on materials from overseas. And even if materials could be sourced or manufactured locally, local suppliers are unable to meet the huge increase in demand. And whilst I hope for the best we are likely to see even more businesses collapse in the next 2-3 years.

I think every business will be at risk at some point by what is happening currently and it doesn’t matter whether they are big or small.

The irony of the situation is that demand for their building supplies continues to be high. The work is there, particularly in Queensland and the Gold Coast, there’s plenty of demand in the industry caused by the high level migration into the state; the Olympic Games; and the lower property prices generally compared to other eastern states.

More often is the case after every economic inflationary situation, a recession follows and it’s unlikely that the government will be able to do anything to solve the issue in the short term.

The next thing we are likely to start to see is that as material prices and interest charges increase, the viability of projects will be reviewed and potentially stopped before the first shovel of dirt is even turned. Victoria’s East West tunnel in a case on point.

Obviously, no one can make the war in Ukraine stop,” so it’s out of our hands “and the other thing to remember is that firstly the suffering we are experiencing in Australia is unlikely to be resolved within three years and secondly, it’s also being felt by the building industry around the world.

We are not alone.

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by Joe Caprara