Business

Six factors leading to perfect storm in the building sector in Australia and New Zealand

The recent collapse of companies in Australia and New Zealand paints a worrying picture of the pain that’s coming for the construction industry.

In recent weeks, construction companies and developers in Australia and New Zealand have folded amid the pressures plaguing the building industry.

Bay of Plenty’s Oceanside Homes, two South Auckland developers and Wellington’s Armstrong Downes Commercial have all gone under.

This paints a worrying picture of the pain that’s coming for the construction industry in the coming months.

Speaking to the Front Page podcast, New Zealand Herald property editor Anne Gibson says a number of factors are combining to create a perfect storm in the building sector.

“It’s being driven by about six separate factors,” says Gibson.

Inflation, a shortage of materials, the extremely high volume of construction, the shortage of labour, the challenges of gaining access to finance and ongoing impact of the pandemic have all combined to exacerbate legacy issues that have long simmered under the surface.

Gibson says the impact has left many businesses struggling to make ends meet at a time when the industry is booming.

The stories reported thus far in the media appear to only be the tip of the iceberg when it comes to the struggles across the industry.

“Andrew Bayly, the National Party’s construction spokesperson, says more than 100 building businesses have gone into liquidation this year alone,” says Gibson.

It comes as Sunshine Coast building company Pivotal Homes, which was once a sponsor of the Gold Coast Titans, went into liquidation in late May.

Managing director Michael Irwin said rising labor and construction costs had strangled the business.

“In my 30 years’ experience I have never seen a set of circumstances like this and obviously we are not alone in these unfortunate conditions facing the industry,” he told the Courier Mail.

“We are absolutely devastated for our 16 Pivotal Homes employees and ensure all creditors, contractors and subcontractors have been paid in full.

“All purchasers are in a net gain position, meaning the work they have paid for has been completed. In fact, they have had more work completed on their homes than they have paid for.”

Derek Cronin of Cronin Miller Litigation, who was speaking on behalf of Pivotal Homes, said liquidation was the only option left for the company after hitting dire straits.

Master Builders Association national vice-president Johnny Calley this week warned that more companies would go under due to the sharp increase in the price of materials.

The high price of building materials has again raised questions about the concentration of market power among a small number of large organisations.

It’s been reported that 94 per cent of the GIB market controlled by the GIB board, 89 per cent of the glass wool supply controlled by three firms, and just two companies control 85 per cent of the concrete industry.

“In November, the government asked the Commerce Commission to look into this,” says Gibson.

“And one of the Jarden analysts Grant Swanepoel looked at Fletcher’s dominance recently and found that it held 94 per cent of the share on GIB boards via Winstone Wallboards, 55 per cent of the cement market and 40 to 50 per cent of glass wool insulation.

“And Fletcher’s Placemakers has about a quarter of the merchant market in terms of small to medium-sized buildings.”

Gibson adds that Carters has a dominant position in terms of supplying materials to businesses in the building industry.

These large companies have both made submissions arguing that there are numerous factors that contribute to the high cost of building in New Zealand, including consent processes and taxes.

Ross Taylor, Fletcher’s chief executive, told the commission materials were but a small portion of overall house price costs, making up only 19 per cent of the cost of a new house. Gibson said Mr Taylor urged the Commission to look into land and consent costs plus taxes for an indication of why prices were so high.

In its submission, Carter Holt challenged the idea of ​​having too much market power, saying there were numerous other competitors in the market.

Gibson compares the Commerce Commission market study to what happened in the supermarket industry recently.

This has since led to the government rolling out a raft of changes in an attempt to increase competition in a market dominated by two large companies.

Whether the Commerce Commission findings do eventually result in changes will ultimately depend on the will of the government.

“Once the Commerce Commission releases its findings, it’s really a political decision for the government about whether it should step in and, if so, how far it should move?”

The fallout from the six-pronged assault hitting the industry won’t be limited to construction.

“Construction often shows stress ahead for other sectors,” says Gibson, warning the pressures facing the building sector are being felt across the economy at the moment.

The question now is how far it will spread and how long it will last.

This article originally appeared in the NZ Herald and was reproduced with permission

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