The economic slowdown, brought about largely from the aggressive interest rate hiking cycle from the Reserve Bank and the surge in inflation is having a major effect on business insolvencies and associated insurance claims. This is showing up most markedly in the Building and Hardware sector.
In the nine months since the middle of 2022, the Building and Hardware sector has experienced the largest level of insurance claims of any sector with 200 claims totalling more than $18.5 million, as recorded by NCI.
There have been a number of high profile collapses of home building companies in recent months with a surge in input costs, a scarcity of skilled labour in the construction sector, a fall in house prices and a downturn in overall activity creating cash flow problems for many companies.
These circumstances sparked the surge in insolvencies and generated hardship in the sector which is still unfolding.
It is important to note that these data are up to the March quarter and therefore do not include the effects of the most recent interest rate increases.
While the effect of tighter monetary policy will add to some of the concerns for the Building and Hardware sector in the next 3 to 6 months, some of the other current negatives are turning.
Over the more medium term, the outlook will improve, although this is likely to be into 2024 rather than in the second half of 2023. The reasons for this likely turn are linked to falling input costs:
- many construction materials prices have fallen from the peak levels seen in 2022, most notably lumber and steel.
- the end to the interest rate hiking cycle is probably here. Money market futures are pricing in interest rate cuts in 2024.
- house prices have risen from the low of February aided by massive population growth. This will add to confidence in the sector.
- the slower economy of the inflow of skilled migrants will ease labour shortages which has implications for labour costs and the speed of construction.
While the near term climate is for on-going subdued activity in Building and Hardware, with a shortage of dwellings increasingly evident, particularly with reference to the surge in demand from rapid population growth, the sector is close to a cyclical bottom and the outlook for 2024 is positive.