Australian builders are in the midst of a “nightmare” scenario that could cause more businesses to fail, homes to take longer to build, and costs to soar after a third La Nina summer was declared and a disastrous rainy season was forecast.
Due to a perfect storm of supply chain disruptions, skilled labor shortages, soaring costs of materials and logistics, and extreme weather occurrences, the construction industry has already been affected by an ongoing crisis, with a number of companies folding this year.
La Nina has raised concerns that it might be the “nail in the coffin” for struggling builders, with millions of dollars in lost revenue per month if the nation is battered by rain.
Construction industry goliaths like Simmons, which reported a loss of almost $10 million, were among the builders whose revenues had been “decimated,” according to Craig Delaney, CEO of Melbourne-based Long Island Homes.
His company had constructed 450 homes annually, but it has since reduced that number to just 200. According to him, La Nina is the icing on the cake after the industry has been metaphorically kicked out of us for the past few years.
Many guys will be really concerned about La Nina, especially those who lack the business knowledge or ability to do anything more than keep paying their mortgages till the good times return. Many men are scoffing and questioning why they are putting themselves through this.
The last three years have been a nightmare for the industry, and For firms striving to recover and take control of the situation, La Nina will be yet another setback.
A terrifying prediction that the housing market will plummet during the next 24 months, however, suggests that builders may have to wait a long time for the “good times” to return.
With future sales being constrained by rising loan rates, inflation, supply chain difficulties, and labor shortages, it is predicted that the yearly number of homes and flats built will fall below 200,000. According to Master Builders Australia’s five-year estimates, dwelling starts in 2024 would plunge to 174,930, down from a staggering 229,790 last year, and won’t rise to 210,850 until 2026.
Contractors will fail
Another architect has issued a dire warning about the devastation that La Nina could cause to the already troubled sector.
The forthcoming La Nina season has been called “a huge concern” by Louis Hanna, a construction veteran of more than ten years who formerly owned and operated his own building company. As it has a significant impact on cash flow, he cautioned, “This is what really pushes builders bust.”
As the head of procurement, marketing, and innovation at Beechwood Houses, which constructs about 500 homes annually in NSW, Mr. Hanna said that most significant builders depend on monthly income from reaching construction milestones for client progress payments.
For instance, a significant builder would plan for $10 million to enter the company each month depending on milestone payments. It’s possible that only $2 million to $3 million will come into cash flow during a month of rain, which we’ve already had three times in 2022 in (NSW), he said.
The supply chain is disrupted, contracts are delayed, and there are further cash flow problems as a result of builders being unable to pay their suppliers and tradespeople. This cycle is awful.
In regards to payment arrangements, Mr. Hanna continued, suppliers used to be more flexible. However, he added, “suppliers are increasingly tighter and more demanding on credit limits and payments terms due to all the so-called danger out there regarding builders. For the first time ever, I’m actually witnessing suppliers and tradespeople quitting their jobs if
strict payment terms aren’t met.
Construction sites that are flooded are not good for builders.
The most dangerous time for builders is before the roof is installed.
“Impossible to construct”
La Nina weather phenomena are linked to torrential rainstorms and widespread flooding, and they were the primary cause of the sweltering temperatures felt in the summers of 2020–2021 and 2021–2022.
La Nina is anticipated to have the greatest negative effects in Queensland, according to Mr. Delaney, a former resident of Brisbane. If the situation turns out to be as severe as expected, he warned, “it will be impossible to develop houses in northern Queensland and even in the Brisbane metropolitan districts.”
“Builders will be preparing for flood zones, and nobody wants to experience another situation like what we experienced in recent years.
“Up north, things are quite challenging. For a large apartment complex, this may initially extend the project by a few months.
According to Mr. Delaney, who has been in the company for 17 years, it may potentially entail an increase of up to $15,000 in the cost of residential construction. “It means canceled work, it’s trading that might not be working right now,” he added. “It might be carpenters or bricklayers not working right now, or slabs not being set, or roofing not being done.”
Work stoppages are occurring because it is extremely risky to work in bad weather, you can’t assign employees to dangerous jobs, and subcontractors will inevitably fail to show up. We lose steam, businesses have cash flow problems, clients must wait longer for their homes, and prices rise all at the same time.
“If the summer is severe, you can miss two to three or four weeks, and a month out of work means delaying buildings behind and pushing back houses in front, which is yet another awful challenge that construction must overcome.”
A daily loss of $300 to $500
La Nina, according to Russ Stephens, co-founder of the Association of Professional Builders (APB), would be most detrimental to projects that aren’t at the roofing stage and could have a crippling effect on the building sector.
In terms of the timetable, a builder may incur costs ranging from $300 to $500 for each day that a delay occurs. In terms of losses, if we assume a one-month delay—which, in light of the estimates, I believe to be fairly reasonable—would entail 20 working days.
It’s important, but the fact that it affects the bottom line is arguably more so. Since builders are already operating on such slim profit margins, it is not lost revenue; rather, it is being taken directly from net profit. Therefore, it is crucial to factor these potential delays into the pricing; otherwise, builders risk more exposure. He advised contractors to check their insurance, think about including extra payment progress stages in their contracts and avoid the urge to use their cash reserves.
Drain of talent
The Labour government’s decision to halt development in September of last year, which Mr. Delaney claimed had an impact on residential builders, has also hurt Victorian construction companies. The state’s labor supply has also been negatively impacted by La Nina’s devastating effects, he claimed. As insurance work is more lucrative in Queensland, he added, “we have already seen a lot of trades go up there, and there has also been leaking into the NSW Northern Rivers area.”
“This increases pressure and stress on a system that has no secret weapons to supply talented and well-equipped individuals to do the work, so something has to fail.” He continued by saying that migration must urgently increase in order to supply skilled craftsmen.
An impending new “tragedy”
Mr. Delaney believes that hundreds of building permits have been returned by young builders who “could not cope,” which is causing the business to be “ripped apart,” but that there is also another “tragedy” that is imminent.
According to him, this would have a negative influence on housing affordability because there will be less industry rivalry, which will increase the cost of both new construction and existing homes because there is a huge demand for homes.
“We have watched families suffer through grief and we have seen so many businesses in receivership that no one wants to see anymore,” he continued. “The industry is sometimes criticized for not caring about its customers, yet I see far too many builders at Master Builder Association events who are worried, striving, and wanting to act morally.”
The “virtually quiet” from the federal and Victorian governments on the “difficult” situation the industry is facing, Mr. Delaney continued, is “extremely unfortunate,” adding that the construction industry’s contribution to the economy appears to be disregarded. According to reporting agency CreditorWatch, the sector employs almost 9% of Australian workers and contributes 7.5% to Australia’s GDP.