Record High Business Insolvencies Strain Australian Economy

Australia is grappling with an unprecedented surge in business insolvencies, with 7,742 firms going under in the nine months to March 31, 2024, according to data from the Australian Securities & Investments Commission (ASIC). This staggering figure marks a 36.2% increase compared to the same period in the previous year, signaling a troubling trend for the nation's economy.

The construction industry has been hit the hardest, with 2,142 firms collapsing in the same period, a 34% increase from the previous year and a shocking 155% above 2022 levels. Home builders, in particular, are facing significant challenges, including high interest rates, a 30-40% rise in construction material prices, and fierce competition for scarce labor from government infrastructure projects. These factors have squeezed margins and forced many builders on fixed-price contracts into insolvency.

The Albanese government's ambitious target of building 1.2 million new homes is now in jeopardy due to these economic headwinds. The high rate of insolvencies is also expected to lead to continued rent increases as long as the government maintains its current immigration policies, further exacerbating the housing affordability crisis.

Why this matters: The record high business insolvencies in Australia have far-reaching implications for the nation's economy and the lives of its citizens. The collapse of businesses, particularly in the construction industry, threatens to derail the government's housing targets, worsen the housing affordability crisis, and lead to job losses across various sectors.

The liquidation of major construction firms like the Porter Davis Homes Group has put significant financial strain on entities such as the Victorian Managed Insurance Authority (VMIA), which covers $235.7 billion worth of state assets and oversees domestic building insurance in Victoria. The VMIA's funding ratio fell from 131% in June 2021 to 103% in June 2023, driven by $300 million in unexpected payouts for the October 2022 floods and the Porter Davis insolvency.

Experts attribute the surging insolvency levels to businesses' operating costs, consumers' living costs, and more aggressive action by the Australian Taxation Office. The average failure rate across all industries is expected to be around 0.3%, but businesses in the food and beverage services sector are most likely to become insolvent, with an average failure rate of 7.44%.

Projections suggest that the total number of companies entering external administration could exceed 10,000 by the end of the fiscal year on June 30, 2024, which would be the highest since the 2012-2013 financial year. While the current ratio of company failures to registered companies is still below the 2012-2013 level, the rapid increase in insolvencies is a cause for concern and requires urgent attention from policymakers and industry stakeholders to mitigate the economic fallout and support struggling businesses and workers.

Key Takeaways

• Australia faces a 36.2% surge in business insolvencies in 9 months to March 2024.
• Construction industry hit hardest, with 2,142 firms collapsing, up 34% from previous year.
• Housing affordability crisis worsened as insolvencies threaten government's 1.2M new homes target.
• Insolvencies strain VMIA, which covers $235.7B in state assets and domestic building insurance.
• Projections suggest over 10,000 companies may enter administration by June 2024, highest since 2012-13.