Suppliers of products and materials throughout Australia’s construction sector may face cash flow challenges as the need to absorb rising costs of some energy intensive materials is coupled with a ‘bull-whip’ effect that will exacerbate the impact of a slowdown in new housing demand, a leading economist has warned.

And concerns are growing that the slowdown in housing construction may be steeper than expected should interest rates rise further than originally expected.

Speaking at the Melbourne event of the Construction Outlook breakfast hosted across several cities on September 21-23, Housing Industry Association chief economist Tim Reardon provided an overview of the outlook for housing construction activity across Australia over coming years.

According to Reardon, two growing areas of concern are that:

  • The downturn in detached home construction may be deeper than originally expected; and that
  • Suppliers of building materials may face cash flow challenges as a ‘bull-whip effect’ exacerbates the impact of the housing downturn at the same time as they need to absorb ongoing cost increases (see below).

Speaking of activity, Reardon says HIA currently expects an orderly contraction from record levels in the detached house construction and a medium-term recovery in multi-unit residential construction (units, townhouses, apartments etc.)

In detached housing, the forecast suggests that commencement numbers will contract over the next three years from the record 131,730 in 2021/22 before bottoming out at historically respectable levels of 99,330 in 2024/25. The low point in activity is expected to be around the December quarter of 2024 or the March quarter of 2025.

Should these current forecasts be realised, the detached house construction sector will experience a mild and orderly easing in which activity will settle back from today’s breakneck speed toward levels which are more normal by historic standards.

In multi-units, HIA expects commencements to increase by 4.4 percent in 2022/23 and 2.5 percent in 2023/24 from low levels of 76,930 in 2021/22 to still moderate levels of 80,730 in 2023/24.

In the immediate term, Reardon sees challenges over the next six months with approvals likely to fall and developers likely to experience challenges in selling completed projects.

Nevertheless, he says numerous factors will support a return to growth in multi-units over the medium term. These include a shortage of vacant residential land for detached housing, rising interest rates and growing affordability constraints (which force consumers to consider less expensive dwelling types), a return to the office and the city and the return of students and migration.

Despite this generally positive outlook, however, Reardon says there growing are concerns that rising interest rates could lead to a contraction in detached house activity which is deeper compared with forecast.

The forecast was predicated on official interest rates peaking at between two and three percent. Within that range, Reardon says there is not much sensitivity in demand for new housing.

A different story emerges, however, should the official cash rate instead rise as high as 3.5 percent to 4.0 percent as some economists feel may be necessary to bring inflation under control. Should this occur, Readon says HIA will likely revise downward its forecast for detached house construction.

Whilst builders will be kept busy for now on account of the current pipeline of work, concern is growing that this may be obscuring a significant effect from the increases in interest rates which could lead to weaker activity from the second half of 2023 once the current pipeline of work subsides.

Indeed, whilst current data relating to building approvals and housing construction loans remains reasonably positive, other forward-looking data suggests that conditions may be weakening.

New home sales, for example, have fallen by fifteen percent and 1.5 percent over each of the past two months.

Meanwhile, data which HIA tracks but does not publish indicates that the number of people coming through display home sites has been slowing since February and the number of conditional contracts being entered into has been declining since May.

“2023 is the year that is expected to be precedented,” Reardon said, referring to HIA’s current forecast.

“It will look a lot like 2019 – tighter access to finance, slowing demand, slowing consumer confidence. But nothing terrible. We are assuming a cash rate of between 2 and 3 percent. Not a great deal of sensitivity in that range.

But if we are talking about further increases in the cash rate next year – a cash rate of 3.5 to 4 percent, that is a big difference. If we are seeing that level of cash rate increases and no reduction in 2023, then we will be revising down that forecast.

“The risk for us is that the building industry is hiding the adverse impact of these increases in cash rates on the wider economy. We are consuming every available worker there is, and there is a risk that the Reserve Bank could overshoot that mark (on interest rates).

“When homebuilding reaches the natural end of this HomeBuilder pipeline which is the middle of next year, if we are looking at sales that are tracking like they are in Victoria over the past few months, then work will slow quite quickly over the second half of 2023.

“There is a risk for the Reserve Bank that they find that the boom in homebuilding that sits underneath the economy falls away very quickly.

As things stand, current HIA forecasts suggest an orderly contraction in detached housing construction commencements along with a modest recovery in multi-unit starts.

Beyond interest rates and slowing demand, Reardon expresses concern that building industry suppliers may be impacted from a cash-flow viewpoint by a ‘bull-whip’ effect.

To illustrate, he talks of framing timbers – products which have been in significant shortfall in the past eighteen months but are now oversupply.

During the Homebuilder boom when supply was short, Reardon says many builders panicked and ordered more than they needed.

This has led to a build-up in inventory and the emergence of piles of timber sitting atop concrete slabs on many suburban building sites.

In response, builders are now reducing their ordering. This is translating into lower sales (and cash-flow) for wholesales, greater inventory build-up at the wholesale level and an even sharper decline in sales and cash flow for suppliers.

This comes at the same time as suppliers of energy-intensive products such as glass, cement and aluminium may be hit with further cost increases.

Suppliers in these industries, Reardon said, many suffer similar cashflow challenges to those which affected builders in 2021.

“What we are seeing play out in the market is the bull-whip effect, Reardon said.

“A small change in consumption at a retail level leads to a disproportionately large impact at the producer level.

“Take timber, those framing timbers that have been in shortage the past 18 months. In the past six weeks, they (shortages) have eased significantly.

“What has happened is that builders have overordered in timber. You ran short of it, your natural response is to overorder. Drive around most residential suburbs right now and you see a concrete slab with a pile of timber sitting on top of it.

“Then the flow on effect is because the wholesaler has overordered. The builder has over ordered.  The wholesaler has overordered on top of that and the producer has got a really distorted sense of where demand sits.

“At this point in the cycle, builders will stop ordering, wholesalers fill up with inventory – we can see that in GDP figures that inventories have been filling up. And then finally the signal flows through to producers.

Producers of timber at the moment are seeing demand come off much faster than what the underlying activity is slowing. They get very distorted signals as to what is happening in the market and there is a risk there that the change in production flows through with further ripple effects.

“That’s where we get the term the bull whip effect. A small shift in consumption at the retail level leads to a disproportionately large shock at the producer level.

“That also means that the cash flow problems that builders have been experiencing over the past two years start to get transferred up the supply chain. Builders have been short of cash because they are paying for timber (when ordered) and have not been receiving payments for it for another six months perhaps (when relevant stages of construction are complete).

“But now wholesalers who have been taking a clip on timber coming through the market as it moved very quickly are now building up their inventory and not getting paid from the builders because builders have already paid for that timber that is sitting on their sites. This means that wholesalers are going to experience the cashflow shortage that builders have experienced.

“The cash flow shortage from a builder’s perspective is coming to an end. The build timeframe went from six months to twelve months to maybe eighteen months. From the end of this year, that starts to come back again. In 2023, you start to see that benefit from that cash flow and the improved efficiency that you should have achieved. As a result of that, the cash flow problem will ease.

“But wholesalers will start to experience that and it will get passed up the supply chain to producers.

“For those in certain segments of the market – producers that have high energy costs, you will get hit from two fronts. One is the cash flow shortage and the second is the rising cost of production – very similar to what happened to builders in 2021.


Reardon’s comments were made at the Melbourne event as part of the Melbourne/Sydney/Brisbane Outlook breakfast hosted by HIA on September 21-23.

At the breakfast, Westpac Chief Economist Bill Evans gave his overview on the economy whilst Reardon also presented the Housing 100 report which was released at the Melbourne event.

Notwithstanding aforementioned challenges in new housing construction, Reardon said the market for existing home renovations was running hot and showed no signs of slowing down.

He forecast that activity in this sector will remain well above historic levels until at least 2023/24.


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