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Event: Interview with Omar De Silva, Enterprise Breakfast, Disrupt Radio
Date: 02 April 2024, 7.05am AEDT
Speakers: Denita Wawn, CEO Master Builders Australia
Topics: insolvencies; housing; labour shortages
E&OE
Omar De Silva, host Disrupt Radio: We know that over the last 12 to 18 months, there’s been a lot of chat in various places around houses and housing and building, but also busting as part of that and joining me now is Denita Wawn, the CEO of the Master Builders Australia. Good morning, Denita. Thanks for joining me. Are we indeed seeing more insolvencies and collapses than we have in the past?
Denita Wawn, CEO Master Builders Australia: We have, unfortunately, so we’re at record highs. We did have a downturn over COVID. The ATO and ASIC were supporting businesses through that time. But unfortunately, the housing industry is always the one that has the longest lag time whenever we have an economic downturn and this is certainly what we’re seeing at the moment, unfortunately. It’s not easy for them. They are building many instances at a loss because they’re working under fixed price contracts that aren’t taking into account the significant increases in prices, both for materials and also labour.
Omar: And so, what, you described there the long lag times before the impacts kick in. Is that just because of the fact that they’ve signed these contracts so many months ago or years ago as is often the case, or is there more to it?
Denita: There’s quite a bit to it, but certainly the key factor is that contracts that are signed in both housing for new homes, detached homes, but also big units, in many instances, they are fixed price contracts with limited or no variation to prices. And when we get the price fluctuations that we’ve seen really over the last five years, material prices are still high and labour is particularly high both in terms of cost, but also the shortage of labour. So, to give you a good example, it takes, it usually took about nine months to build a detached home. Over COVID, it took 15 months. Now it’s still at around about 13 months. And time equals money in our game and, unfortunately, if you’re seeing long lag times, in terms of turnover, but also seeing the situation in which labour is much higher than expected, then you will unfortunately see building at a loss, which is what is happening at the moment in many instances.
Omar: Yeah, and it’s obviously, it has far reaching impacts, right, because there’s the industry and there’s obviously all of the homeowners, there’s the investors and so it has multiple impacts downstream and from what I understand that is, I suppose, a maybe not a unique issue, but it is an acute issue for the industry that if one person falls over it can actually create this domino effect for many others. Is that indeed the case, and is that something that’s sustainable or something that needs to be looked at?
Denita: It’s something the industry is working under with these contracting systems and this huge subcontracting system has worked for centuries, basically. And so the situation is really that the structure is right, but there are problems within facets of it and fixed price contracting is one of the keys that we need to look at variables. Not so much for the contract with the mum and dad homeowner building a home. They need certainty and there is legislative certainty for them, but certainly big contracts, including large developers and governments, they need to be model clients and look at ways upon which you can vary contracts if you get such skyrocketing prices that we’re not foreseeing to years prior when you tended for that work. So, there are issues that we need to address, and it’s got to start with who the client is and then work down from there. And we, of course, feel sorry not only for the builders, but their clients, their subcontractors as well when things collapse.
Omar: Yeah, it’s, that’s right. It again, it has an impact on multiple levels. I’m curious from you, you mentioned the labour shortage, are we seeing that there’s been a spike in individuals that have decided to set up themselves and sort of start their own companies and become developers and builders and therefore there are less people available to be hired by others or are people leaving the industry? Where’s that labour shortage coming from?
Denita: It’s a multifaceted approach. There’s not one simple reason, but you’ve actually very much articulated two of the problems. Despite all the insolvencies that we’re having at the moment, there have been more companies established than they were insolvent over the last five years. So, we’re seeing more companies develop. So, it’s still a viable trade, but also, we’re seeing people leaving. We’re seeing people leaving because in some instances we’re seeing jobs like such as mining and also civil infrastructure being more lucrative in terms of the salaries than it is staying in our sector. And I heard of one commercial builder lamenting the other day that he’s lost two carpenters to being traffic controllers in civil infrastructure, because they were earning over $200,000 as a traffic controller in a major civil infrastructure project. So, we have that issue, but also, we have simply not trained enough Australians in a trade. We’ve had dwindling numbers for decades, it’s occurred since everyone was encouraged to go to university, we say that trend needs to stop. And we’re certainly encouraged by the Labor Government that are recognising the importance of trade just as much as university qualifications.
Omar: Yeah, interesting you say that as a little anecdote, I was actually in Canberra last week meeting with a couple of ministers and their advisors. I was there to talk to them about higher education, they only wanted to talk about skills in the VET sector. So that certainly seems to be the travel of direction, which is a direction of travel rather, which is, which is a good sign. What about all of these sorts of, I’ll say “unfinished projects,” and there’s probably a more technical term there, but you know, you’re driving down the road and you see, you see something that started but it looks like it’s stalled for whatever reason, what happens in that situation? Are the homeowners that have invested in that property are they sort of going through a process, are the builders trying to get some more capital? Is someone else looking to take them over? What do we what do we assume when we see something like that on the road?
Denita: Yeah, it’s interesting, I’ve noticed that in my neighborhood as well. There’s a couple of reasons. Sometimes there’s financial troubles by the homeowner themselves, or the developer themselves. Interest rates, the number of increases we’ve had over a short period of time has meant that financing is difficult, and so we see clients themselves get into financial difficulty, have to tell the builder to stop, which in turn then has an impact on the builder. If the builder has gone bust, then there is home warranty insurance, where the insurer finds another builder, but that certainly can take some time. And I know Master Builders, our member associations around the country are supportive, where they can be in terms of finding new builders that are available to complete a job. But that does not stop the emotional and financial stress of when those occur. But it’s not simply just because of the builder, either it could well be that they’ve stopped because they can’t find a roofer, or they can’t find a trade to finish off the home and it’s fine to sit there for a month or two before the finishing trades come through. So, a good example is 40 different trades work on a home, normally, it is synced to the minute virtually, so you can turn that house around as quickly as possible. And that’s simply not happening at the moment because of the shortage of trades.
Omar: And so, I mean, I’m sure you don’t want to talk about specific companies here but I’m starting to hear in advertising, you know, the larger companies talking about the big backing that they have from bigger parent companies and really trying to sort of create that message of surety and certainty. Is that what you sort of foresee for the industry more consolidation, the bigger players getting bigger and sort of playing to that certainty that consumers need? Or do you see that there are still going to be lots of small entrepreneurs out there doing their thing as well?
Denita: Well, the industry is made up of 99% of small to medium sized businesses. 50% of them don’t even have any employees, I think that will still continue. The clients have to do their due diligence when looking at builders. Certainly, from our perspective, we like to look at and promote best practice in business, not just the building techniques, and have certainly held a number of awards over the last few years that we’re trying to pursue best practices of our sector. But certainly, the builder has to do their due diligence as well on clients, and they have to negotiate what is the best outcome for all parties, not just one party. So, due diligence is the thing and clients need to ensure that they are undertaking all that due diligence rather than just looking at marketing to make sure that they’re comfortable with the financial capacity of the builder. Equally, the builder has to do likewise with the client. So, there’s some issues there around what is best practice in contract negotiations and due diligence and that’s certainly something that we’re trying to pursue, rather than be looking at how to fix the problems when problems arise. Let’s be proactive as much as we possibly can.
Omar: Just like the cliche goes, if you’re good at baking a cake doesn’t mean you can run a bakery. If you’re good at building a house doesn’t necessarily mean that you can run a building company. That’s Denita Wawn, the CEO of Master Builders Australia, and this is Disrupt Radio.
Media contact:
Dee Zegarac
National Director, Media & Public Affairs
0400 493 071
dee.zegarac@masterbuilders.com.au