The low-down on construction
The story of inflation is affecting Kiwis across the country. This week, we saw it rise to 7.3%, with households feeling the financial squeeze of rising living costs.
As the economy tightens, we expect more households will struggle to pay all their bills. We are already seeing the beginning of this trend.
Our business community is no different. A turndown in spending will start to impact bottom lines, not to mention the risk of missing out on outstanding payments.
One sector significantly affected by these changes is construction, with companies facing significant challenges as material shortages, rising costs, and the housing market downturn continue to place pressure on the sector.
Company credit defaults in the construction sector are beginning to rise, reaching the highest default rates since the final quarter of 2019.
This year alone, more than 100 construction companies have been placed into liquidation and defaults (ie missed payments) are up 10% compared to same time in 2021. Across the country, 25% of all company liquidations in May were from the construction sector.
Credit scores for the sector are also in decline. The average credit score for new credit applications (construction businesses applying for finance or a loan) across the sector is down nine points to 768 as the potential risk of default increases across the sector.
The construction sector is a significant portion of New Zealand’s economy. Comprising 14% of New Zealand’s total businesses, the sector is made up of about 80,000 businesses with an average trading period of nine years.
Interestingly, 24% of construction companies were incorporated since March 2020 (post Covid), perhaps as a result of redundancies during Covid forcing people to revert to their trade, or to ride the wave of the construction boom at the time.
And now, these companies pose a big risk – only a third of companies go the distance for more than five years.
In fact, the latest data from Corelogic shows the cost of building a standard 200m2 brick-and-tile house rose 2.6% nationally over the quarter.
Meanwhile the number of consents for new builds has reached record levels, particularly for multiunit homes, showing a lasting demand for productivity in the sector.
So the question becomes, how can Kiwis protect themselves from being stung by constructioncompany closures and liquidations while also continuing to support the sector?
While some companies continue to thrive, the lingering impact of Covid-19 restrictions coupled with the current building-supplies crunch, disrupted supply chain, and labour cost increases will continue to impact those businesses that are already struggling.
If your business is a supplier to the construction sector, it’s a good idea to be proactively managing your credit risk.
A business credit report can help you to understand who you’re lending to, protecting your cashflow by letting you know immediately if a customer’s credit score indicates they are unlikely to pay their bills on time.
Likewise, consumers who are currently involved with a construction project should take heed and proactively check the credit history of who they’re working with.
This can help to prevent being left short-changed if anything should happen to the company in the near future.
Whether it changes your mind about working with them, or simply influences how you budget for the project, arming yourself with the information in a credit report allows you to better manage your cashflow.