Two big bank honchos have highlighted the growing financial risks in the construction sector, as builders face a hit from surging costs of materials and increasing wages bills.
Elliott said struggling to pass on higher costs was the reason why these construction firms could not cope with the “massive” shifts in the price of commodities and labour, adding that companies in the construction and commercial property sectors were at higher risk of failure in a downturn.
At an Australia-Israel Chamber of Commerce luncheon in Melbourne, Elliot said “the business model has moved towards a fixed-price contract model” and “the problem with that is that when you end up with cost shocks or labour shortages, the business can’t pass it on, so you are in this weird situation, which is sort of counterintuitive: construction is booming, and construction companies are falling over,” Brisbane Times reported.
At The Australian Financial Review Banking Summit in Sydney, McEwan said the dramatic surges in prices of key building materials such as steel and timber, as well as rising labour costs amid severe shortages in skilled workers, were squeezing builders that committed to fixed-price contracts with clients – though he said the bank’s broader loan book remained in good shape.
“That [construction] is probably the sector that is most worrying, but our book when we look across it, we are yet to see any signs that the economy is having difficulty,” he said.
McEwan noted the economy had rebounded strongly, but supply chain pressures, mounting costs, plus the risk of surging interest rates were biting for NAB’s clients.
Also at the Sydney event, Matt Comyn, chief executive at Commonwealth Bank, said the Australian economy was in far better shape than that of the US, but also indicated that CBA was cautious towards the housing market, Brisbane Times reported.
“As rates go up there’s going to be downward pressure on prices,” Comyn said. “I don’t think it’s going to be a problem; I think clearly the labour market is still extremely strong, but I think consistent with probably a number of indicators we are seeing, it’s probably a time to be slightly more cautious.”
For banks, loans for commercial property and construction were two of the higher-risk types of lending, and Elliott said there was no easy answer to the problems faced by construction companies.
“It is a fragile sector,” he said. “And we shouldn’t be terribly surprised – history shows us that in any sort of crisis or downturn, sadly construction and commercial property are two of the most prone to failure because of that structure of the way they run their businesses. So I don’t know the answer to that, clearly there’s a lot of complexity.”
Jarrod Marin, Credit Suisse analyst, recently revealed construction exposure had been declining across most of the big four banks in recent quarters, and such loans were generally under 1% of the big four’s total lending, Brisbane Times reported.
