IN FOCUS Construction

Choppy waters ahead for the residential construction industry – this is a time to be vigilant!

Wayne Clark MICM, MAICD Executive Director, Building Industry Credit Bureau

As they say, ‘what goes up must come down’ and this is certainly true, at the moment, for the residential construction sector.

What a difference a year makes! This time last year, and despite a number of high-profile company collapses which sent shockwaves through the industry, overall insolvency numbers remained relatively low. Insolvency numbers fell quite sharply from June 2020 and remained relatively low until the second half of 2022. (see graph below). However, insolvency experts were warning that the construction industry was a “bubble waiting to burst”

Construction Insolvencies Average per Month

Factors contributing to this elevated risk

Over the last two years builders have had to deal with a broad range of issues, from Covid-19 lockdowns, supply chain issues, severe weather events, rising material and wages costs and low profitability.

These issues have caused substantial blowouts in construction completion times, in many cases by as much as three months or more. Also, many builders on fixed-price contracts have made substantial losses. There is no doubt these issues are putting many businesses at risk. These factors have all contributed to what has been widely described as the “profitless boom”.

Overview of current risk in the building & construction Industry

According to a recent HIA media release, the number of detached houses commencing construction is set to decline this year to its lowest level since 2012. This will see the number of detached housing starts fall below 100,000 starts per year for the first time in a decade to just 96,300 in 2024. This is a very rapid slowdown from the 149,000 starts in 2021. (HIA Media Release 21 February 2023)

This decline in the number of detached housing starts will generate a competitive pricing environment, particularly among the volume builders, in order to win work. This will ultimately impact their profit margins.

Construction industry insolvencies as a percentage of all insolvencies have increased by almost 12% (11.88%) during the Covid era. We expect to see that trend continue to increase over the next twelve months.