Company failures hit a two-and-a-half year high in July, driven up by construction industry failures, Australian Securities and Investments Commission data showed last month and the string of collapses that has ranged from large commercial builder Probuild to small-scale home builders has already triggered scrutiny over the way risks are shared between parties in the chain.
Direct bank exposure to building and construction services is low – less than $40 billion, or 0.8 per cent of total bank assets in August – and arrears on construction company loans remained low as of March, meaning industry collapses posed only a limited risk to the banking system, the RBA said.
However, the close financial reliance businesses have on each other magnifies the risk, the bank warned.
“Financial stress can quickly spread from troubled builders to these construction services businesses through delays or defaults on payments for work already done,” it said.
“For the median builder, around 40 per cent of total liabilities were short term unsecured trade credit (i.e. unpaid invoices) in June 2020 – around twice as much as for other businesses.”
So far, at least, there was little transmission of financial problems from builders to subcontractors, the central bank said.
“Liaison with banks suggests that the majority of subcontractors affected by recent builder insolvencies have been able to absorb disruptions to their cash flows using their cash reserves or existing lines of credit, and some have been able to access additional credit,” it said.
“Some subcontractors have also responded to higher risks by shortening payment times for builders, thereby reducing their stock of trade credit exposures at any given time.”
Separate figures from data company CoreLogic on Friday showed residential house-building costs jumped 11 per cent over the year to September, up from 10 per cent over the four quarters to June and well above the 7.1 per cent growth recorded a year earlier.