Construction recovery may not be “long enough and strong enough” for related businesses

Insolvency firm Ferrier Hodgson has raised concerns that the improvement in residential construction may not be “long enough and strong enough” to allow downstream construction businesses to recover from financial damage suffered over the past two years.

The total number of new dwellings commenced rose 8.2% in the December quarter in seasonally adjusted terms, following a fall of 0.6% in the September quarter, Australian Bureau of Statistics figures out last week showed.

The number of new houses started in the December quarter of 2013 was up 4.2% in seasonally adjusted terms compared with the previous year, while units were up 20.6%.

However, the seasonally adjusted number of new dwelling starts was still below the previous peak in 2009, which preceded a slump in construction activity that lasted until early 2012.

Ferrier Hodgson noted that while initial signs were promising, the recovery had been patchy and construction businesses would need to monitor where growth was occurring and consider chasing work outside of their local area.

“A national construction-led recovery doesn’t necessarily mean the construction work will be spread evenly around the country and will almost certainly not be driven out of the hotspots of the last boom,” Ferrier Hodgson said in a report.

The Housing Industry Association noted that while NSW and Western Australia had driven much of the recovery in construction to date, there had been only a modest number of dwelling commencements in each of those states during the December quarter.

Victoria contributed most to growth in dwelling starts in the December quarter with commencement numbers up 11.3%. Activity in Queensland also grew strongly, with dwelling starts up 15.8%.

Ferrier Hodgson said downstream businesses such as landscapers, cabinet makers and manufacturers of household products could expect a lag of up to 24 months before they saw the benefits of increased residential construction.

Numerous construction-related businesses went under during the downturn in construction, and smaller businesses would continue to struggle to meet ongoing fixed costs through a prolonged downturn and long recovery, the liquidation firm said. 

This article first appeared on Property Observer.