Toxic construction tests banks

Ian Rogers

The accelerating demise of residential home builders, especially over recent weeks, may soon be compounded by a decline in credit availability to the sector.

Reserve Bank of Australia data on lending to business, released yesterday, shows a slump in credit for the construction sector (both residential and non-residential) from a peak in January this year.

Total credit to the sector is down by six per cent over the year to May, with a notable downturn in credit extended to large businesses for non-residential construction.

Lending overall, across all businesses in the economy, has picked up strongly over the last year, with the RBA’s measure showing that total business finance outstanding at the end of May was 13 per cent higher than in May 2021.

Banks, for now, are supporting most smaller-scale operators in construction, with lending to small and medium businesses in residential building holding steady so far this year, the RBA lending data shows.

Over the last couple of months, a dozen or more home builders have hit the wall; calling in administrators or (as in one case early this week) being ordered by a court into a wind-up.

“The construction sector remains a problematic sector, as the fixed price contracts that are unique to the sector remain a serious drag on profitability,” CreditorWatch observed in its latest Business Risk Index, for June; adding, “insolvency activity will increase over 2022”.

The construction sector now has 11.9 per cent of firms in arrears of 60 days or more on trade payments, the worst for any industry.

In a webinar yesterday on the CreditorWatch Business Risk Index, James O’Donnell, managing director of Open Analytics, said: “I think construction will get even worse than our data indicated.

“A lot of builders are making losses on jobs, we’re seeing inflation really affect construction. It’s a pretty unpleasant outlook, unfortunately,” he said.

Industry and bank executives on the webinar queried why the probability of default forecast by CreditorWatch for construction this month – at 3.8 per cent, which is a lower probability than for most sectors, and way lower than for hospitality - was so low. O’Donnell did not really elaborate.