A contraction in detached house construction activity across Australia albeit from an elevated base will have flow of effects for suppliers of building products and services, a new analysis has found.

In its latest report, senior analysts from industry research firm IBISWorld have analysed challenges in the small and medium sized enterprise segment of the housing construction industry to determine the impact which is likely to be felt by upstream and downstream players on account of a likely contraction in activity as well as other challenges such as rising costs, project delays and insolvencies.

It found that sharp increases in interest rates have added to already strong industry pressures on cost, labour and material supply.

Further, impacts are likely to extend to several industries (refer below). These include door and window manufacturing, plumbing good wholesaling, clay brick manufacturing, landscaping, fire alarm installation, and surveying and mapping.

“Sharp interest rate rises have placed further pressure on the already fraught house construction industry,” IBIS researchers say.

“This is bad news, both for construction firms and for the many surrounding industries they interact with.”

The latest report comes as activity in detached home building is expected to drop back from current record levels.

According to IBIS World, revenue in the small and medium enterprise segment of the housing construction industry will come in at $29.7 billion in 2022/23.

Whilst this represents healthy activity by historic standards (by comparison, the corresponding figure ten years earlier in 2012/13 was only $25.4 billion), it still implies a 3.9 percent drop compared with the past financial year during the peak of the HomeBuilder boom.

In addition, the report warns that the sector faces ongoing challenges.

These include supply and labor shortages, rising prices for crude oil and electricity and disruptions from east coast floods.

All these are leading to cost blowouts and project delays, and may result in higher levels of insolvency.

IBIS Senior Industry Analyst Matthew Reeves says the impact should not be underestimated.

Added to this, Reeves says, are the now rapid increases in interest rates – albeit with rates remaining relatively low by historic standards.

All this adds to the likelihood of further building insolvencies as well as other firms leaving the industry.

He says faster growing firms who work on multiple projects simultaneously are likely to be particularly challenged.

Smaller and/or more bespoke builders who have no more than two or three jobs at a time may be more nimble and better able to navigate supply chain difficulties.

“The industry has been plagued by rising crude oil and electricity prices, and supply shortages in key goods, most notably timber,” Reeves said.

“Numerous flood events in New South Wales and Queensland have exacerbated these issues over the past six months. The floods have disrupted the import and transport of goods around Australia and have damaged and delayed building projects.’

“Recent interest rate hikes from banks have placed pressure on industry firms, particularly small-to-medium enterprises (SMEs) that don’t have the cashflow to cover the sudden rises. The major banks have already announced their intention to pass on the RBA’s 0.5 percent July cash rate rise in full, adding further stress to over-leveraged construction firms.”

In its report, IBIS says flow on impacts could be felt in several upstream and downstream industries.

Whilst many impacts will flow from the slowdown in construction revenue (albeit from a high base), others will result from builders cutting back on the scale and cost of features in completed buildings.

In particular, according to IBIS, in 2022/23:

  • The aluminum door and window manufacturing industry will see revenue fall by 10.2 percent to $4.2 billion and will see almost 100 firms leave the industry. The industry derives almost half of its revenue from the residential building market and is highly sensitive to a residential building slowdown.
  • Clay brick manufacturers will also be affected as these too are heavily dependent on residential construction. Advance Bricks, an 82-year-old brick manufacturer in Stawell, Victoria, closed its doors at the end of 2021/22. More firms will exit the industry in 2022/23.
  • Revenue in the landscaping services industry will contract by 3.8 percent to $6.5 billion in 2022/23 whilst 650 landscaping businesses will leave the industry. Landscaping services gets almost one-third of its revenue from new housing developments.
  • Also impacted will be the $3.5 billion fire and security alarm installation services industry, which is also exposed to the market for new residential developments.
  • Finally, surveying and mapping services will also likely suffer from the downturn in housing construction. The decline will particularly threaten SMEs, as they derive a larger proportion of revenue from cadastral surveying services, which include property line surveying, subdivision layout and design work.