Here's why the construction industry is collapsing like a house of cards, and why your industry could be next.

Since January 2022, more than 15 prominent Australian building companies have stopped construction, appointed administrators and terminated staff, affecting thousands of families, creditors, workers, and some commercial customers.

Sadly, many of us knew this was coming, and importantly, if we don't start to think, this level of business failure won't end at construction. In order to circumvent almost certain business calamity across many sectors, all business owners, managers and even customers need to look to the construction industry as a cautionary tale.

So what happened?

Ask anyone in construction and they'll tell you a story of supply chain issues and increased costs. Both are true. There are real supply chain challenges across many sectors. This is a global issue and doesn't have to be explained.

Increased costs are also a global issue but are particularly destructive to the Australian construction industry where most customers sign fixed price contracts, meaning the builder needs to absorb all the additional costs as prices rise during construction. Keep that important fact in mind because it becomes very relevant shortly.

Insert Australian Federal Government HomeBuilder economic stimulus package here.

In case you don't remember it amongst the many economic bubble creating pandemic initiatives, the HomeBuilder stimulus provided grants for people to build a new home or substantially renovate an existing home. The grants weren't huge in the context of the cost of a new build. Yet, the initiative proved very popular. At last count, there were 137,755 applications through the scheme. That's a lot of promises the construction industry was happy to make.

Remember, we were in a pandemic. Supply chain issues had already begun. Yet customers paid deposits for their new homes and then... crickets. Their land sat empty for months. Maybe a slab was poured or frame went up, and then, nothing.

So the Government stepped in again. Less than a year after the scheme began, the Government announced they would allow new home builds to be significantly delayed after the contract was signed by the customer, by extending the construction commencement requirement from six months to 18 months.

Think about that... you sign an agreement to have your house built in May 2021, you pay your substantial deposit, for many, their entire life savings, and then the company doesn't legally have to pick up a shovel until November 2022. Now go back to the part where the company must absorb all additional costs as prices rise, and prices certainly have. Hold that thought...

This pearler comes directly from the Australian Federal Government Treasury website regarding the HomeBuilder initiative... "HomeBuilder formed part of a range of Australian Government initiatives intended to support confidence in the residential construction sector and encourage consumers to proceed with purchases or renovations that may have been delayed due to uncertainty around the effects of the COVID-19 pandemic."

Did you get that? "... encourage consumers to proceed with purchases or renovations that may have been delayed due to uncertainty..."

By now, you may be starting to put together some of the elements of the perfect storm that blew over the construction house of cards.

Next, let's look at the timing. Last year, money was cheap. The cheapest it had ever been. Interest rates had been falling for over a decade. While my first home loan was 9.6%, many of the HomeBuilder target audience have never seen an interest rate rise in their entire adult lives. Perfect time to build a house with the help of some taxpayer funded money. In addition, the stock market did well further instilling false confidence. And much of the population still maintained an income, even if only being paid to sit on the couch. We weren't spending much in lockdown so we did ok overall.

Builders said, "Wow, look at all these deposits and future income we will make with all these contracts being signed!" Home owners said, "Wow, the Government will give us some of our deposit for our new house!" The tradies said, "Wow, look at all this work we've got during a pandemic. I've never been busier!" Suppliers said, "Wow, look at all these orders!"

No one ever once said, "Hang on, let's just think, we might be in a bubble."

As we all know, bubbles burst.

And so it has burst in spectacular fashion. Now we're ready to put the story together. As at March 2022, $2.1 billion has been paid by the Australian taxpayer in HomeBuilder Government grants. At the same time, supply chain issues worsened meaning there were limited materials to build all these tens of thousands of partially taxpayer funded houses. Costs rose exponentially, meaning the 18 month delay the Government allowed backfired on the builders when their cost of build skyrocketed by 10% to 15% (and is still rising). Add to that, staff shortages in the construction industry have seen a labour cost blowout, further adding to the cost of build for the builder, compounding the inability to meet all those promises to all those hopeful home owners.

While everyone looks around for someone to blame, we need to remember that one important fact: Bubbles burst. Always.

I don't know what the answers are for the stressed out builders and creditors, the suddenly unemployed workers, and the devastated would-be home owners. It is a truly tragic turn of events. People have literally lost everything. What I hope is that maybe we can all learn something from what we have observed.

Firstly, no Government can artificially prop up any business or sector without consequences. It's physics. Every action has an equal and opposite reaction. So when you see the next Government hand out, stop and think... could you be walking into a bubble? Knowing the answer to that question may save you your entire life savings.

The other lesson is, as prices rise they must be past on to the consumer. As painful as that is for all us consumers, it is the only way for everyone to keep their jobs in every sector and for creditors to continue to get paid. If the company is forced to absorb all the costs of increases in labour, production, distribution, etc, they will not survive, and with their demise will be lost jobs and reduced competition.

Stop and think about your employer, the businesses you supply your products or services to, or the businesses from whom you buy or trade. If you are in business with someone, as a customer, a supplier, or an employee, your win can't be the business's loss. If the business always loses, everyone eventually loses when the business no longer exists.