Caught in a cash-killing zone of rising wages, surging costs and rising interest rates that not only hurt their bottom lines but shrink the potential customer base, one in three big home builders are losing money.
This is the view of the Reserve Bank. Clearly, the builders (like most of us) must be hoping the central bank has hit us with its last rate rise.
With upcoming economic data drops over the next couple of weeks, this question is bound to be answered. If the economic indicators say inflation isn’t falling fast enough, then Cup Day, the first Tuesday in November is ‘live’ for another rate hike.
Right now, we’re in an economic ‘Twilight Zone’ caught between a perceived current economic reality and an unknown future. However, we can’t be sure even about the recent past because official statistics are often behind the times. And the organisation (i.e., the Reserve Bank) charged with the job of beating inflation and avoiding a recession is purely ‘guessing’ about what’s going on with inflation, the effects of its policy and the state of the economy.
It's like someone tiptoeing through a minefield with their fingers in their ears! Now that’s a story that could have featured in that great old TV show The Twilight Zone.
Personally, I suspect the RBA has done enough to scare us out of inflation, but it always takes more time than central banks like, so they often over-tighten or over-loosen. This builder trouble could be the canary in the coalmine and I’m hoping the RBA’s new boss Michele Bullock sees it this way.
The AFR summed up the plight of big home builders like this:
Source: RBA Financial Stability Review/AFR
These five negatives above are all RBA observations about the building industry, and Queensland building company Hutchison Builders reports that it had $3 million revenue for the past year but had negative cash flow.
This is just one industry sector. You have to ask if retailers, hospitality, tourist businesses and all those selling consumer discretionary goods and services are experiencing the same issues about costs, labour supply and interest rates that are squeezing builders.
The RBA must be careful about future rate rises and Master Builders Australia chief executive Denita Wawn explained why with the following observation: “The building and construction industry is the canary in the economic coal mine and activity will be very dependent on the macroeconomic environment. Australia's economy is navigating a challenging period.”
Let’s hope Captain Bullock can steer the economic ship of state away from the ‘rocks’ that could sink us into recession, which ironically is the best way to kill inflation. However, a recession comes with unemployment, bankruptcies and forced home sales, which is why RBA governors get paid over a million dollars a year to beat inflation without ruining the economy. Go Michele!