by Paul Gidley27.09.18

You would have to have your head and shoulders in the sand to miss analysts’ gleeful reporting of property market portents.  It appears they enjoy nothing more than a very public stoush. What is less obvious is which side will be proven correct; doomsayers of an economic perfect storm or the optimists’ easily weathered squall?

On the doomsayer’s side there are dropping house prices, and auction clearance rates around the low-mid 50% mark, an imprecise but trend-indicative barometer of the house market. All reports point to a market gone off the boil, some say poised to plummet.

Let’s not overlook the recent increase in mortgage interest rates, possibly an indicator of more to come if international financial markets interest rates, a source of one third of the major banks loan funding, continues to rise.

Coupled with that is the maturing of the forty percent of interest-only loans funded between 2014 and 2015. Moody’s credit rating agency predicts that monthly repayments for many will increase by up to 30% when the loans switch to principal and interest. Mortgage stress anyone?

While estimates of families reaching mortgage stress sit at around 1 million households, the banking royal commission indicates that more borrowers than previously thought have less discretionary spending margins, and less financial resilience.

The natural resources downturn has already hit some communities hard where debt to income ratio is unsustainable and unemployment and underemployment rising.

And if that isn’t enough, international investment restrictions has squashed Chinese investment in Australian apartments with a glut looming and prices tumbling in the major cities.

On the opposite side to the doom and gloom purveyors is the otherwise buoyant employment rate, inconsistent property price movement – in some areas house values are increasing, or at least holding steady, concentration of large mortgages in the wealthiest sociodemographic with high financial resilience and Australia’s extremely low 1% rate of non-conforming (our equivalent of US sub-prime) mortgages.

The debate is fanning the flames of that untameable beast – contagion. Without contagion the Global Financial Crisis might have been an isolated US financial crisis, according to some analysts. And for the volatile, high-insolvency-rate construction industry, negative consumer sentiment and spending contraction can be the difference between staying afloat, or, for the many already travelling low in the water, going under.

Corporate Advisers to construction micro, small and medium enterprises (MSMEs) need to be considering how their clients can steer a prudent course whichever way the wind blows.

As late as 2015, poor financial and business acumen has been identified as a principal contributor to the high rate of insolvency in the construction sector.

Put your clients on notice – now is the time for robust business management practices. Start provisioning against payment problems further up the construction food chain. Undertaking due diligence when dealing with new suppliers and principals is particularly important. Rising insolvency rates can provide cover for serial phoenixers.

The same research that identified poor business acumen as a risk also identified significantly low awareness among contractors and subcontractors about using retention of title clauses in conjunction with the Personal Properties Security Register. This protection of interest in unpaid goods and materials, supplied but not installed, from secured creditors claims may be the difference between sinking and swimming.

The PPSR will offer your clients some protection from insolvencies in the contracting hierarchy. Avoiding underbidding will protect against their own. As the housing market contracts and construction work dries up the climate is ripe for underbidding, suicide bidding (cannibalising cashflow from an underbidded contract to pay for work on another contract) and bidding on jobs outside of skillset.

In our combined 70 years’ practice, Shaw Gidley have seen overly-optimistic and panicked bidding for work outside of area of expertise become one of seven common mistakes MSMEs make that contribute to business failure, particularly in the construction sector.

Shore up. Perfect storm or storm in a teacup, one thing is certain, a storm is coming.

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.