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Construction company collapses tipped to continue due to rising material costs, interest rates hikes

Builders are collapsing in a loss-making boom, and 'greed' is to blame (Nassim Khadem)

Experts say construction companies across the country will continue to go broke as material costs and interest rates keep rising. 

The future of dozens of projects in Queensland, including two sites on the Gold Coast, New South Wales and the Australian Capital Territory is uncertain after the collapse of PBS Building this week.

Master Builders Gold Coast regional manager Adam Profke said it was a nasty situation for everyone involved and the industry's crisis would continue for months.

"It's an exceptionally tough time, it's unprecedented," Mr Profke said. 

"Those guys that are still around today say it's tougher than back in the [global financial crisis]."

Master Builders Queensland Gold Coast regional manager Adam Profke says it is an exceptionally tough time for builders. (ABC News: Steve Keen)

Mr Profke said rising prices, labour shortages and interest rate increases had led to cost blowouts, which meant builders on fixed-price contracts were finding themselves unable to sustain the financial losses.

The collapse of Canberra-based PBS Building is the latest in a string of high-profile insolvencies that began last year and included companies such as Probuild, ConDev and Oracle Building Corporation.

Mr Profke said a lot of the pain was being felt on the Gold Coast.

"We've had a really unprecedented building boom — we're talking 50 to 60 per cent year-on-year growth," he said.

"A lot of our builders are locked into fixed-price contracts for the work and just to get through those projects builders are sustaining losses, because they're not able to pass those on to their clients."

An apparently abandoned PBS building site on the Gold Coast. (ABC News: Steve Keen)

'Looking tough'

Mr Profke said he expected more companies to go bust throughout April or until early May as they began to report to the taxation office.

"That's when people's tax debts are realised and they have to pay those bills back," he said.

"We are expecting to see some more insolvencies.

"At the moment it's a matter of pushing through … we'd like to think that by the middle of this year things will [normalise], but unfortunately for us there are a lot of factors that are outside our control that impact on the survivability of our businesses.

"Builders who do go into administration are obviously angry and upset, this is their livelihood, their families that we're talking about, their employees and their staff, those people don't have jobs to go to."

AMP chief economist Shane Oliver said builders were feeling the same pressures hitting households and more were likely to be unable to survive the cost pressures.

"The same issues that have affected households have affected businesses, because the cost of building materials has gone up," Dr Oliver said. 

"I think the odds are, we probably will see some more construction companies unfortunately, go bust. Because the cost pressures are still there, [although] they're not as intense as they were."

Squeezed from both ends

Dr Oliver said builders were starting to feel the bite of interest rate increases because of the industry's reliance on debt. 

"As [material] costs go up, that starts to put the squeeze on them, particularly at a time when demand for new property has declined a little bit because of higher interest rates," Dr Oliver said. 

AMP Capital chief economist Shane Oliver says the builder insolvencies come amid a high demand for housing. (John Gunn.)

"So they get squeezed from both ends, they get squeezed because of higher interest costs on their debt, and because there's less demand for the buildings that they're putting up." 

He said that had put Australia in a tight spot, because the country was facing a housing shortage.

"It's all a bit of a shame, really, because Australia has a fundamental shortage of housing," he said. 

"[We] really need to keep building up. [We] really need these construction companies to stay afloat to keep supplying property in the Australian property market.

"Otherwise we'll come out of all of this with immigrants returning to Australia and foreign students returning with an ongoing shortage of property, [and] ongoing, very poor housing affordability."

Calls for a soft landing

The spate of 10 consecutive interest rate increases has resulted in the country recording its weakest month for loans to build new homes in almost 15 years, according to the Housing Industry Association's chief economist Tim Reardon. 

He said the first interest rate increase in May 2022 marked a decline in new work.  

"The first increase in the cash rate in May certainly marked a watershed moment, and since then volume of new work entering the pipeline is slowing very quickly," Mr Reardon said. 

Despite this, he said it was estimated that builders across the country have about two years worth of construction in the pipeline.

"This isn't what we saw in 2020, this isn't a falling off a cliff moment, because there was an enormous amount of work underway when the Reserve Bank started raising rates," he said.

"There's still two years [worth] of homes set to reach completion this year, which means activity on the ground is still strong."

He said that meant there was "a long landing strip for the industry" as demand for new builds slows, but he was concerned that the RBA continued to raise interest rates this year. 

"The full impact of that first rate rise in mid-2022 won't turn up in the wider economy until 2024," he said.

There have been widespread shortages of tradies across Australia's construction industry. (ABC Goldfields: Jarrod Lucas)

Watchdog suspension notices

To avoid the hit to subcontractors, suppliers and consumers when building companies collapse, the Queensland construction watchdog has embarked on a campaign to ensure businesses meet financial requirements.  

The QBCC says it helped creditors get back millions of dollars in money owed last year. (ABC Gold Coast: Dominic Cansdale)

Last month the Queensland Building and Construction Commission announced it had imposed license conditions on more than 500 licensees across the state under its mandatory financial reporting regime.

The businesses that failed to report made up less than five per cent of the registered licensees in the state, but they were given a March 6 deadline to lodge their reports.

The regulator said that any outstanding licensees were sent proposed suspension notices and given 21 days to avoid potential suspension or cancellation. If they failed to report properly they could have their building licences cancelled.  

"Improved financial reporting increases the QBCC’s ability to monitor licensees potentially at risk of insolvency to help us protect others in the payment chain," the QBCC said in a statement. 

The QBCC also helps building industry creditors who are owed money and said it helped creditors secure payment of $4.73 million last year through its complaints process and $15.85 million through the adjudication of payment claims. 

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