Event: Denita Wawn interview with Kate O’Toole, ABC Radio Mornings
Date: Saturday 1 April 2023, 10.00am AEST
Speakers: Kate O’Toole, host ABC Radio Mornings; Denita Wawn, CEO Master Builders Australia
Topics: housing industry, insolvencies
Kate O’Toole, host ABC Radio Mornings: You might have heard it here yesterday, news of yet another building firm going into liquidation. Porter Davis, which is based primarily in Victoria but with around 1,700 homes across the country, including hundreds here in Queensland, have decided to go into liquidation. A story that’s become all too familiar in the last couple of years. Denita Wawn is the CEO of Master Builders Australia. And it just seems that every week or couple of weeks, there’s another big headline, Denita. What’s the situation at the moment?
Denita Wawn, CEO Master Builders Australia: Yeah, good morning Kate. I think the best way to describe things in the industry at the moment is fragile and volatile. We’re seeing a situation upon which we are unfortunately having companies going into liquidation, that means clients and subcontractors and the employees are all affected. As are the builders themselves. And it really arises from a combination of situations where pre-covid and during covid. There was a huge demand for housing, that builders signed fixed-price contracts that are required either from legislation or required by banks. And as a consequence, when inflation hit, and building prices went up in terms of materials and labour, the builders had to wear those cost increases and not be able to pass them on. So, that’s put huge amount of pressure on the builders, and when you combine that with inflation and interest rate increases, seeing a significant decline in new forward contracts, the cash is simply not coming in. So, it’s interesting though that the liquidation stats are on average over ten years, but we are seeing a greater proportion of larger businesses adversely affected.
Kate: Sorry, so just to break that down a bit. The liquidation stats are still sitting at average? It feels like there’s a big headline every couple of weeks. You’re saying it’s the same number of companies; it’s just that it’s massive ones going under at the moment?
Denita: That’s right. When we look at the ten-year average of insolvencies in our industry, it’s about on par with that ten-year average. But what we are seeing at the moment, and we are trying to track it, the size of the businesses that are going into liquidation seems to be larger than normal. We are continuing to keep a track on that over the next couple of months. We’ve always said between March and September was really going to be the crunch time this year in terms of these insolvencies. It has been forecast that this could occur, given the culmination of the situation in the industry.
Kate: So how many more big companies are sitting on a knife edge?
Denita: Well, we can’t say. We don’t know what is happening internally. But you do hear the stories that people are finding it very, very tough at the moment. They are juggling. We know from bank data that there’s been significant withdrawal on personal assets by the building industry to prop up their businesses to keep them viable. So we continue to remain concerned. As I said earlier, we’ve always forecast that we would see some particularly difficult time between March and September of this year. So there’s still a bit to play out. The big issue at the moment is how we resolve this going forward. And one is a recognition that fixed-price contracts mean that the risk all resides with the builder. There’s no sharing of risk. And we’ve got to sit down with all the stakeholders in the industry as well as people like the banks and governments and so forth and say how do we ensure that builders are not put in this situation when they are hit with unexpected increases of the magnitude that we’ve seen over the last 12 months.
Kate: On the text line, we’ve had someone comment really pointing the figure here at the interest rate hikes and the pattern from the Reserve Bank. The texter says, “they never learn. Exactly the same way it began in 2008. Too many interest rate hikes in a row before waiting for the effect to filter through.” Is that a key issue from your perspective, Denita?
Denita: It’s a contributing factor. What we’ve seen is that every single time those interest rates go up, we get less and less contracts signed for new builds which means that the cash flow dries up. And I know talking to some builders, we’ve seen a decline of more than 50 per cent in forward sales than what we saw over the last couple of years. So, that is a significant hit. We have forecast that we will see only around about 150,000 homes built next financial year, and that is well short of the 200,000 that we were aiming for throughout the country. So, we are seeing a situation which builders are going bust, a significant decline in forward sales as a consequence of inflation and interest rates at a time when we actually know that we need more housing. It is a crisis point for the country in terms of how we house our Australian community.
Kate: You’re hearing from Denita Wawn, who’s CEO of Master Builders Australia, reflecting on another major building firm going into liquidation yesterday. A building firm that was more interstate than in Queensland, I have to say but still a couple of hundred homes that were directly affected; in production of being built and then several hundred more contracts that had been signed that had not begun the build yet. So we’ve been speaking with Denita about the situation for these big building companies. But what about those further down the chain that get affected by something like that? What happens if you have a home that is part-way built by a big company that goes into liquidation? Where do you sit?
Denita: Well, there are safeguards in place, including home warranty insurance and so forth. It varies around the country, the arrangements that are in place. But nevertheless, there are insurance requirements, and I’m certainly aware that there are some guidelines available to Porter Davis clients and so forth. So, certainly, we are finding that it’s a situation upon which there is insurance available. Nevertheless, that does not detract from the stress that this creates for families, the stress that this creates for sub-contractors, and the builder and their employees as well. It’s never easy when these situations arise, and it’s very concerning for those individuals that are directly affected.
Kate: So, in that way, are sub-contractors protected as well? Just say you are working on a building site as a sub-contractor to a major company like this. They go bust, and you are owed tens of thousands of dollars. When are you likely to see that money?
Denita: Well, it just depends. There’s a range of legislative requirements in places like Queensland as well as legal requirements. It is dependent on the circumstances upon which those sub-contractor contracts have been signed. So if there is a process to go through, that is why all endeavours are undertaken to stop these things happening in the first place. But certainly, there is no doubt that the liquidators are working hard to try and assure those who are owed money as well as those homeowners who just want to see their homes completed.
Kate: As you say, though, cash flow is about timing as much as anything to how a business fairs. And for sub-contractors, they’re in this tight spot which is presumably going to be prolonged now, right? Because it takes a while for all of this to sort through. That they will have similar pressures at a different scale on their own businesses?
Denita: That’s absolutely right, and unfortunately, it does go throughout the entire supply chain. And that’s why, while we are focused on the here and now as an industry association, we need to focus on looking at the structural reforms that are required to minimise the impacts on this. And one of them is around risk-sharing and looking at the contracts that we have as standard form contracts in this country to see whether or not we can minimise the difficulties that we are seeing ourselves. But it really has been a situation in which the builders have been hit hard by skyrocketing costs somewhere up to 25 per cent of building materials, likewise for labour. And when you’re working on small margins, all of that has just been eroded, and you’re building at a loss. So we are seeing a huge amount of building activity around the country, including Queensland, at the moment, but in many instances, builders are building at a loss because they are not able to claim back those significant increases that they have had to pay themselves.
Kate: But it’s been a couple of years now where there’s been rapidly increasing costs. So there’s been no way to strategise around that to figure out a way to make contracts work in an appropriate fashion in this marketplace in the last two years?
Denita: There’s no doubt that once you know what those cost implications are that you change your pricing accordingly in your contracts. But we’ve got to realise that in many instances, what is being built now are contracts that were signed in 2020/2021. And as a consequence, they did not foresee the significant increased hikes in prices for materials and labour that we have been experiencing over the last 12 months. And so, as a consequence, when you’ve got a large book of fixed-price contracts that did not take into account 20-30 per cent increases in prices, then you are stuck, and you’ve got to wear those increases yourself as the builder on a fixed-price contract. That is where the sticking point goes and that’s why they are focused on trying to get new contracts that do take into account that increase in price but there simply has not been enough coming through because of the price rises and as such the cashflow has dried up.
Kate: State by state there’s different regulations. And so in the case where you’ve got a major builder who is operating in several different states at once, how can any one state effectively protect their own sub-contractors in this situation and prospective homeowners?
Denita: Well, each state has different rules. We’ve always suggested that it would be so much easier if there was a harmonisation of building regulations and building licensing, but alas, that does not happen. And as a consequence, people have to deal with the different regulators in each of the jurisdictions. It is very messy. There is a very good report known as the Shergold Weir report that outlines a range of changes to the building industry, including in licensing and regulations, that is still sitting on a shelf and no one wants to implement it.
Kate: That sounds like a can of worms, Denita. That is too big for me to peel open at this point. But thank you so much for speaking to us today. Appreciate it.
Denita: Pleasure, thanks, Kate.
Kate: Denita Wawn is the CEO of Master Builders Australia.
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