The Bridge: Concern for the Next Six Months is Widespread

We continue the occasional series of comments and feedback from around the industry as we journey across the Bridge towards to the COVID Safe economy.

To place that in context the reference to “The Bridge” is a drawn from comments made by Dr Philip Lowe, RBA Governor in announcing a $A105 billion liquidity package for the banks on 19 March, 2020 stating that:

“…to get to the other side we need a bridge…. Building that bridge requires a concerted team effort, with us all pulling together in the country's interest.”

What follows is a series of anecdotal contributions up to and including 8th May.

Dr Alastair Woodard, Manager - National Residential Construction & Fit-out, FWPA has provided an update on recent conversations across the builder network which are covered in the following summary.

Residential Building Sector – Corona Virus Impact Update Week 30th March – 8th May 2020

Contact has again been made this week with a range of building and construction sector reps (HIA,  merchants, importers/wholesalers, builders) in Vic, Qld and NSW, to get a feel for the residential construction market, at this start of May, during the midst of the current national social distancing measures, where people are only allowed out their homes for the four defined activities - food, exercise medical treatment or work.  

With the isolation requirements seemingly having been very effective in currently containing the spread of CoVid-19 across Australia, they are definitely starting to negatively bite with the residential construction sector, and everyone, public and business, is awaiting the federal and state governments commencement of the relaxation of some of these restrictions to allow life to start to gain some normality.

Thankfully, the building and construction sector has remained an essential work service, and activity over April in the sector has continued to be strong. Whilst previously, March was reported to have been one of the busiest and best months for many of the major residential builders, merchants and importer/wholesalers, April was again reported as also being very busy, as committed residential construction work in the pipeline continued to be delivered.

The following provides a summary of some of the feedback right at this point in time.

Builder observations/feedback

What residential builders are currently extremely concerned about, is not the current work, or even the next couple of months, it is what the future holds beyond this.

Most builders, particularly the volume ones, still have a reasonable number of jobs in the pipeline that they continue to work through, whilst administering appropriate social distancing practices with workers on-site. Thankfully there have been no reported outbreaks or clusters related to construction projects.

The absolute biggest concern for volume residential builders at present is the dramatic reduction in new home sign-ups. This is a very consistent theme nationwide.

Different builders, depending on their customer base, report different drops, but the general feel is that new home sign-ups are significantly down – could be as high as 50% for some builders.

This new sign-up plummet appears to be due to a combination of potential buyers uncertainties about their future financially (even those that still have a job), and because people simply cannot get out and around display homes and builder display centres.

Many of the volume builders have put in place significant on-line display home inspection facilities, that allow virtual walk throughs using professional online videos, or are using Zoom/MS Teams videoconferencing to speak with potential clients. But the reality is people are very unlikely to make a final decision and sign-up just based on an on-line inspection. People obviously want to visit and experience homes before making such a significant purchasing decision.

The key current issue from most builders is getting some direction from government and clarity about the future.  There is a major hope that the Government will start relaxing the current social distancing restrictions to allow more display home visits.

HIA reps have advised that they have been very active at federal and state levels talking to Government about possible stimulus packages; the impediment to date has been that the Governments obviously and rightly have been focused or more urgent NOW matters. The government are now though becoming more receptive and several Building & Development Industry Taskforces have been recently established.

The Stimulus package suggestions have been based around activities to allow people to commit to new home sign-ups as soon as possible, providing financial incentives and removing the red-tape, including the following suggestions:

  • Opening of access to display homes as soon as possible
  • Increased First Home Buyers grants
  • Waiving of fees and stamp duties
  • Fast tracking of building approvals
  • Postponement any new regulations or rules
  • Getting shovel-ready land available as soon as possible

Once things start to get up and running again there are some different views about how quickly things might pick up depending on the builder’s customer base.

  • There are concerns that those builders focused on first home buyer (FHB) are likely to be hit harder as these FHB’s are more likely to have been hit by job losses, have concerns about getting reemployed, and have more difficulties currently accessing finance.
  • Those builders, with a broader 2nd and 3rd home buyer focus (who generally have more capital), are felt likely to do better.
  • With those focused on the investor market, it is a bit uncertain.  Some customers may be in a financial position to commit to jobs, others will not.

The current concern also is about the ‘Immigration Impact’ with government starting to talk about restricting migration to allow local Australian workers to take up new jobs. Also, there seems no doubt that the Federal Government will look to maintain a border closure or restrictions for some time even once Australia’s CoVId-19 position improves. HIA acknowledge this concern and are undertaking modelling on this at present. It has also been mentioned anecdotally from builders that new migrants generally wait around 18 months before they buy – rather looking to rent whilst they get a feel for a new city, so that could add a further delay to migrant new home sign-ups even when migration starts up again.

So, the builders summary at this point, start of May, is that currently things are still busy whilst there is work in the pipeline, but with new sign-ups dramatically down, it’s about what the future holds over the next 3-6-12 months and the challenge is how to read the future to prepare for what it holds.

Frame & Truss observations/feedback

F&T companies also report that they have been busy over April in Vic, Qld and NSW, though with demand a bit down on that from March.

Again, the concern is what the future holds, as advice from their customers, the builders, has been that new home sign-ups are right down

The general response is that builders asking for quotes has been relatively strong still over April but appear to be starting to drop back at present. One Vic F&T manufacture has reported a significant increase last month in the number of quotes for renovation work which was unusual.

F&T businesses appear to have adapted well to the introduction of required social distancing measures and proper health practices within their manufacturing facilities.

One new issue reported though was some unexpected challenges with some of their building professional customers now working from home, and the transfer of large drawing and specification documents. It was noted that all this adds additional time to servicing jobs.

Timber supply to the F&T sector to date appears to be currently fine, but uncertainties were mentioned about possible timber import supply in the near future - what volumes will be available, lead times and the overseas $-movement?

Another internal dilemma raised was around future ordering all being a bit of a gamble at present with the current future uncertainty – don’t want to put in big timber orders and then find the market continues to stall and that there is no work, or conversely that stimulus activities allow the market to pick up rapidly and not  having ordered enough stock to meet the needs.

There was a general comment that September may be a crunch month with F&T as by then

  • the builder pipeline work will be well worked through, and
  • if builders have started to secure new work, they will want to get it underway rapidly as weather in southern states will be getting better and pressure will be on for builders to get houses well progressed or finished by Xmas.

So, the F&T manufacture summary at this point is, business has been OK over April, but the significant issues are uncertainty about future work, and managing cashflow over the end of year/New year period.

Supplier observations/feedback

  • Merchants and importers/wholesalers again are all reported good sales over April – though they like all others are also unsure and obviously very concerned about what the next 3-6 months might hold.
  • Feedback is that there seems still to be plenty of timber supply available and that the recent issues with the NZ shutdown has not had a significant effect to this point as most importer/wholesalers had more stock on hand at the end of last year than has been needed. It was a comfort though that the NZ industry had reopened, and supply was again available.
  • It was reported that some manufacturing sectors supplying the residential sector were starting to fall behind and price rises had occurred in some products, which was currently vey unappreciated by builders in these uncertain times – not timber thankfully.
  • It was noted by a couple of suppliers that it is expected when things start to open-up again, that builders will have to be offering some real $-sweeteners to get customers quickly back in the market.  It was stressed that supply chain partners to the residential construction sector will really need to be very conscious about this, and also assist however they can. ‘Price stability’ is the top issue that has been raised by all volume builders in FWPA’s recent Top 100 builder interviews. Price stability is critical for volume builders who pretty much all utilize fixed price contracts with customers and are often signing jobs up 6-12 months ahead of build date. Any increase in price in this period they effectively must absorb.

In conclusion not surprisingly there were some consistent views from those spoken with on the current situation.

The absolute biggest concern is what the next 2-3-6 months holds, when the hole due to the current reduction in new home sign-ups might come, how big it might be, and how long the effect will last.

What the residential construction sector needs is some clear direction from government and clarity about the social distancing restrictions.

The key issues at present then include:

  • continuing to ensure that Australia’s building and construction sector remains open,
  • that public social distancing requirements start to be relaxed to allow potential buyers to get back out to display homes and builder showrooms so that new home sign-ups can again start to be secured, and that
  • work continues in earnest with the Governments, federal and state, to get in place appropriate stimulus measures to provide financial incentives and remove the red tape to allow new building to progress as quickly as possible.

Again, who knows what the next few months hold, but a concluding positive thought for the week.

“The best way to predict the future is to create it.” – Abraham Lincoln

Moving overseas we have received a variety of insights from industry colleagues.

Joe Elling, Director, Market Research, APA (American Plywood Association based in Tacoma, WA, USA)

In the U.S. though, a disproportionate share of the cases have been in NYC. The timing of reopening economies varies across the states. For example, WA state will not be reopening of consequence until May 31, at the earliest. We are going to be the caboose, to use a train metaphor. It is very frustrating and it seems like the governor is unaware of what this means for small businesses within the state economy.

Restarts of construction are taking place at different rates across the nation. Mandates regarding social distancing and limiting the number of subcontractors to one firm at a time will result in longer time from start to construction. Material supply shortages, most notably like lighting fixtures, doors, appliances, are becoming more visible. Home builders are more reticent to make land acquisitions. On the non-res side, brick-and-mortar retail construction was already in the doldrums. It wall fall further and the depression in this sector will be extended into 2022-23. Hotel construction, which had been going gangbusters for the last 3-4 years is likely to be on the downslide beginning later this year.

Wood products producers in North America are taking a variety of means to reduce production. These include reduced shifts, move maintenance downtime forward, 3 days of operations, slowing production without shutting down, etc.

Email Exchange Jim Houghton, Joe Elling 8 May, 2020

Russ Taylor, Managing Director, FEA-Canada (WOOD MARKETS) based in Vancouver, BC, Canada

For BC, the provincial government laid out plans yesterday for our reopening – much more conservative than the US, that is for sure! We move from our Phase 1 (stay at home, social distancing with no groups larger than 6, etc.) to Phase 2 next week (groups up to 50, some retail and restaurants reopening if they meet regulations, day trips in your more local area, US-Canada border still subject to 14-day self-isolation if you want to travel, etc.). No stadium events until there is a vaccine! The industry was operating under Phase 1, so no real changes. 

The BC sawmilling industry’s real reason for curtailing is still due to its high government stumpage rates – as a high cost producer, it is the first region in North America to curtail when US prices get too low. This position is unlikely to change until 2021 when the goofy formula for stumpage starts to reset (it will do so on July 1 but is expected to be a small change).

Email Exchange Jim Houghton, Russ Taylor 8 May, 2020

Kurt Shcrammel, Director, Vida Canfor, based in Australia and Europe

In the Americas our Home Centre business is going very strong – but it can’t fully compensate for the very slow builders merchants business. However prices started to recover after lots of capacity was taken off the market. We plan to restart our BC mill in about 1 week and our SYP mills in the South are almost back to full capacity

In Europe after couple countries started to reopen parts of their industry we experience a real rush – they all want to catch up the lost time. So all our mills are back on line and in full swing.

China is also fairly busy, but European benefit from the Russian boarder closure and the slow start of the NZ log shipments.

One fundamental question applies to all these markets – now we are busy again – but what will happen in the later parts of the year?

Email Exchange Jim Houghton, Kurt Schrammel 7 May, 2020

If you have any other stories or anecdotes that you think might be of interest to the broader industry as we journey across the Bridge please contact Jim Houghton