Home Builders Face Risks as Demand Rises

Smaller home builders and subcontractors are under pressure as demand for new projects increases, but many lack the financial reserves to handle the workload, according to new data from Equifax. Without enough cash flow and working capital, these businesses are at higher risk of insolvency, particularly those with fewer than 5 employees.

The residential construction sector is struggling financially, even as non-residential commercial and infrastructure companies show signs of recovery. While credit ratings improved for 32% of civil engineering firms and 25% of commercial builders, only 14% of residential construction companies saw upgrades last year, highlighting the sector’s financial vulnerability.

Despite a recent stabilisation in total construction insolvencies, the outlook remains challenging for smaller residential builders. Many are taking on larger contracts than their financial capacity allows, increasing their exposure to risk. This trend is particularly concerning in states like Victoria, where builders report lower profit margins and working capital levels compared to other regions.

The broader construction industry is slowly recovering, with fewer insolvencies expected in the months ahead. However, financial instability in residential construction remains a concern, as businesses juggle large commitments without the necessary capital buffers. While stronger, more established firms may navigate these challenges, many smaller operators could struggle to survive growing financial pressures.

Source: Australian Financial Review, BCI Central