Risky Business: Insolvencies Tipped to be 20pc Higher

Insolvencies are on the rise in 2023 as more businesses feel the pinch of the current landscape, and construction is expected to be at the thin edge of the wedge.

In an exclusive TUD Plus members-only webinar, Creditorwatch chief executive Patrick Coghlan revealed business insolvencies were likely to be 20 per cent over pre-Covid rates as 10 consecutive cash rate hikes bite and consumer confidence nosedives.

It’s the big squeeze for businesses wedged between rising costs and falling demand, creating a pressure cooker environment, according to Coghlan.

He says insolvencies, administrations and court-ordered wind-ups are almost back to pre-Covid levels, and show no signs of slowing for the remainder of this financial year.

“Businesses are really well positioned to handle this downturn, but there will be administrations, insolvencies and failures, and we’re certainly starting to see that,” Coghlan says.

“We’re almost back to pre-Covid levels. There’s been plenty of talk about failure in the construction industry, they’re certainly always first or second on the list in terms of risky industries and volumes of insolvencies.

“Over the last nine months, they’re at the same sort of number of insolvencies for the last pre-Covid financial year, and there’s still three or four months to go. So it’s definitely going to go above and beyond what the norm would be pre-Covid, and that’s the same for most industries. We’re expecting probably about 20 per cent over, as a generalisation.”

Coghlan is forecasting a November peak for default rates, a key business-risk metric, while they were likely to plateau into next year.

“When will the market bottom out, well that is the billion-dollar question. But we are expecting to have more visibility on where things are heading in the [second half] of 2023,” Coghlan says.

“What we’ll see in the second half of this year, probably the fourth quarter of this calendar year we will likely have some visibility around that and that will certainly kickstart some activity in the economy and the construction industry as well.”

Consumers are tightening the belt with interest rate hikes biting into household budgets, up to 80,000 fixed-rate home loans rolling off throughout the year, and a downward trend in home builds.

CreditorWatch chief economist Anneke Thompson says the Reserve Bank of Australia will pull all its levers to bring inflation down to its target of 2-3 per cent.

“High inflation embedded in the economy is an absolute disaster, so we have to get rid of it—as tough as that will be,” Thompson says.

Thompson believes employment and inflation have peaked and we will start to see a downturn over the next six months. But she says household debt is the biggest risk factor in the economy right now, and cash rate rises will impact new borrowers, and marginal borrowers who were just servicing their mortgage. 

Weighing heavily on the employment rates will be the increasing rates of overseas migration.

Thompson says migrants are drawn to Australia for its employment opportunities, which will have a flow-on effect for the nation’s property market.

“In my view, overseas migration has bounced a lot quicker than I thought it would. Migrants are attracted to jobs growth, there are a lot of jobs in Australia, even though we’re past that peak,” Thompson says.

“That’s adding to our supply of workers, but it will be interesting to see what this does to our housing market. This will impact unemployment, it will impact house prices, and it will impact rents as well.

“Obviously all these people will need somewhere to live. [But] to build a house and build apartments at the moment is very tricky in the current financial state.

“We’re nearing the completion, in October this year, of the huge volume of housing commencements (from HomeBuilder). Then it falls off a cliff, and we have a much smaller volume of housing commencements going forward.”

Australian Bureau of Statistics building approvals data reinforces this point. The total number of dwellings approved fell 27.6 per cent in January.

ABS head of construction statistics Daniel Rossie says private sector house approvals fell 13.8 per cent and it was the fifth consecutive drop to the “lowest result recorded since June 2012”.

Apartment and townhouse approvals fell 40.8 per cent in January this year.

Article source: Queensland Property Investor