We are in truly unique times. A record amount of construction work needs to be done, prices are going up, yet productivity is going backwards, and we now have record insolvencies not just in Construction, but across our economy. How could things go so wrong? And how do we get out of this construction death spiral?
Let’s start with some background. Due to immigration running at more than twice as high as it’s ever been (bringing in more than twice the population of the entire ACT every year), there will continue to be increased requirements on all types of infrastructure. Demand for housing will also continue to grow, with the Federal Government saying we need to build 240,000 dwellings per year from now on for the next 5 years – this year we achieved 163,759, with approvals decreasing. Every dwelling not completed adds to the shortfall, which means we should be fairly confident that house prices are unlikely to fall.
There is a caveat to the above statement: insolvencies topped a new record of over 11,000 last financial year. Construction had the highest number with 2712 for the year. Individuals and businesses are cutting back on spending due to cost of living pressures caused by continuing rampant inflation. Comparing last year to the prior year, 57% of people cut back on eating out, 49% on entertainment, and perhaps most worryingly 45% cut back on car fuel. If people aren’t going anywhere, they aren’t spending or earning.
It is no wonder that the renowned Phillip Di Bella (of coffee empire fame) said that 15% of cafes face closure shortly amid mounting costs and falling discretionary spending. Very much on point, his response to what the solutions are: “Low wages are not the answer. It is getting rid of other costs like payroll tax, fringe benefits tax or bank charges on debit accounts.” Regarding his more recent venture “We are still not making a profit at Coffee Commune, but still have to pay payroll tax”. A smart business operator won’t be continuing like that forever.
CreditorWatch’s predictions are similar. They forecast business failures in the upcoming year of 5.1%. Their comprehensive database has found a dramatic 49.9% year-on-year drop in the value of invoices held by Australian businesses. Compounding that problem is rising payment defaults, signalling that despite lower order values businesses are finding it increasingly difficult to pay suppliers. CreditorWatch also identified a strong correlation between business-to-business payment default and the probability of the business failing in the following months. My opinion is that the predicted 1-in-20 failure rate is light on based on falling demand (sales/invoice values), as well as inflationary cost increases (labour, materials, and financing costs), creating a squeeze. One domino falls, and it’ll topple others in the supply chain.
Rising business failures and falling consumer spending flows through to the property market also. It puts a cap on how much people can pay in rent or to buy/build a dwelling.
Industry experts are predicting that building costs will skyrocket by more than 30% over the coming 4 years. It’s worth taking notice of Hutchison Builders (successful since 1912) chair person Scott Hutchison thoughts: “We didn’t make any money last year. We won’t make any money this financial year”. Productivity has gone to the floor and “the lack of productivity is driving prices up”. “Rising costs will mean less private work is done. No units will be built unless they are very expensive like $25,000 a square meter”.
To put that into perspective, a normal 2 bedroom unit is about 90m2, which means they need to sell for $2,250,000, which is between 20-30 times average/median income. Clearly, there will not be many (if any) affordable houses built. Not that I’ve ever understood why there is an assumption that people new to property ownership should have an expectation of getting a new house. Surely if an existing owner builds a new house, their current one will be on the market, and the chain of events continues until further down the line a property sells that is more affordable? Previous generations started small and made their way up the ladder. One great way to ensure this happens is to do away with stamp duty (which was supposed to disappear when GST came in), a major disincentive for people to downsize or relocate.
So how do we stop the construction death spiral?
- Address cost issues. Qld Construction wages are increasing 26% between 2023 and 2027. But as Master Builders Qld CEO Paul Bidwell says “We can’t manufacture new people. What we want is for some agreement or a recognition that we need to get more productive without cutting corners on safety or workers conditions”. He highlighted the Qld Government “Best Practice Industry Conditions” policy, which is extending to all construction projects in Qld: “(Construction workers are) well paid and they need to be, but it’s how we get five days a week of work. Now sometimes if it’s pouring rain you can’t work” but BPICs conditions requires double pay when it rains and up to $1,000 a week for workers who travel more than 50km to a site. As the saying goes, someone pays for all this, and if you don’t know who, chances are it’s you (in this case all tax payers).
- Compliance and regulatory costs account for 30-40% of the cost of a new dwelling. The worst part is that 75% of all new roles in our country in the past 6 months were in Government (that is, only 1 in 4 in the productive private sector). The biggest increase (up 9%) was regulatory roles in the Climate Change, Energy, Environment and Water portfolio. And the outcome from all these extra regulatory roles is that they approved LESS projects. 5 Federal regulatory agencies are expected and budgeted to increase their staffing numbers by more than 30% this coming financial year. The Institute of Public Affairs has released research showing that red tape at a Federal level had increased 88% since 2005. There is now an astounding 1 regulator employed in Primary Industries for every 3 farmers in Australia.
- In a market short of people to work, it’s time for business to push back by finding ways to do more with less. Some of this requires innovation, and there are suggestions for instance to use pre-fabricated houses built in factories rather than building on site.
- Force better utilisation of existing dwellings. I was talking to a builder friend on the weekend, and he had just built a new house for a foreign owner to live in, but he owned 35 properties in Southeast Queensland that nobody lived in. Instead of land banking, force especially overseas owners to either rent the properties out or sell into the market. With homeless people sleeping in cars etc, review social housing so that any vacant bedrooms are either filled, or the occupant is moved to suitable sized accommodation.
Looks like the big ship needs to change course, or it’ll hit ground pretty hard. Some of the heavy lifting needs to come from the Construction Industry ourselves, but a lot of it comes back to ensuring we have a much simpler business environment. We need a massive reduction in the full rainbow of tape colours, and much less burdens from unproductive regulations and costs.
Words from the wise
Sometimes there is a need to change perspective and course, as this infamous story shows:
US Ship: Please divert your course 0.5 degrees to the south to avoid a collision.
CND reply: Recommend you divert your course 15 degrees to the South to avoid a collision.
US Ship: This is the Captain of a US Navy Ship. I say again, divert your course.
CND reply: No. I say again, you divert YOUR course!
US Ship: THIS IS THE AIRCRAFT CARRIER USS CORAL SEA*, WE ARE A LARGE WARSHIP OF THE US NAVY. DIVERT YOUR COURSE NOW!!
CND reply: This is a lighthouse. Your call.
As always, Onwards and Upwards!
Fred Carlsson
General Manager
