Higher unemployment, the end of the HomeBuilder scheme and a rise in mortgage stress will combine to create a perfect storm in early 2022 that will see record numbers of residential building companies collapse across Australia.
Construction Marketing Specialist and Cofounder of the Association of Professional Builders (APB), Russ Stephens, said current market manipulation will safely see residential builders through to the end of 2021.
“Extension of the HomeBuilder economic stimulus by the Federal Government and allowing new home builds to start up to six months after contract signing will be a big relief for Australia’s residential building sector,” he said.
“But it will be a different story come 2022 with the end of the JobKeeper Payment scheme driving unemployment higher and the new home builds likely to dry up with the end of HomeBuilder.
“Finance will also be harder to obtain, with 40 percent of mortgagees already in mortgage distress and a significant number of them expected to default once the mortgage ‘holidays’ are over.
“These factors will lead to less demand for residential construction and will come after a ‘boom time’ which has generated high positive cash flow for builders and created a significant spike in their work in progress accounting adjustment (WIPAA) liability.
“Once the market softens those builders that are unaware of this hidden liability will find there is not enough cash coming in to cover the debt that has been previously created.”
According to early results of APB’s State of the Residential Construction Industry Annual Report, 79 percent of residential building companies are not calculating their WIPAA correctly each month.
“This is a big problem at the best of times, but right now, when residential home builders have never been busier and are signing more contracts than ever before, it’s a recipe for disaster,” Mr Stephens said.
“Builders will start to experience severe cash flow problems as soon as sales stop growing, which we anticipate will be the case in early 2022.
“However, that’s not the only problem facing this industry, with over a third of builders we surveyed not understanding the difference between markup and margin.
“We also found that 70 percent of building companies are operating without a CRM system and having never emailed their database, and 90 percent are operating without an objections manual.”
Mr Stephens said builders needed to put systems in place now in order to stay ahead of competitors and avoid being forced to cut margins when demand slows.
“Planning and budgeting now for the tough times that are coming is vital, as will be implementing a financial system for extracting the true financial data, rather than simply relying on the generic reports generated by standard accounting software.
“Builders should also be looking at a project review process in order to reassess their supply chains and plan future service levels using construction slots.”
The Association of Professional Builders has already surveyed more than 750 builders in Australia, the United States of America, Canada and New Zealand for the State of the Residential Construction Industry Annual Report. Full results of the survey will be published in March 2021.
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