Construction defaults triple in six months

Serious arrears among construction companies at the three largest commercial banks have nearly tripled since the start of the year, reaching 29.7 billion Icelandic krónur at midyear compared with 9.3 billion at the end of last year, mbl.is reported.

Sigurður Hannesson, director general of the Federation of Icelandic Industries, said the figures showed the pressure facing the sector. He warned against an interest rate increase by the Central Bank when its monetary policy committee announces its next decision on Wednesday, August 19.

“When the arrears ratio triples in six months, it is clear that some parts of the sector are approaching their limits,” Sigurður told Morgunblaðið.

The construction sector’s arrears ratio rose from 2.3% to 6.2% over six months, while its debts increased by 74 billion krónur. Sigurður said the development was occurring alongside falling real house prices, longer selling times and a growing number of unsold apartments.

He said a further interest rate increase would have three main effects: raising companies’ financing costs while they were already under pressure, reducing investment and signalling during collective bargaining reviews and budget preparations that the Central Bank intended to shoulder the burden of bringing down inflation alone.

Sigurður said the last point might be the most serious. If high interest rates reduced housing construction, fewer homes would be completed when demand recovered, potentially increasing pressure on house prices.

“Fewer homes under construction now mean less supply when demand returns, which will put upward pressure on prices,” he said.

Sigurður declined to predict whether construction companies were heading for insolvency, but said the arrears figures spoke for themselves.

“The question we are putting to the authorities is simple: What is gained by putting even more pressure on the sector that is supposed to build the homes we need?”

He said overly tight economic restraint could ultimately undermine the monetary policy’s own objective. He also pointed to the rapid increase in unemployment, which stood at 5% in June, up 2.1 percentage points from a year earlier.

Sigurður said he would not predict how much further unemployment might rise, but noted that construction was labour-intensive and that the effects therefore emerged quickly and strongly.

“The developments of the past 12 months show how quickly the labour market can weaken when restraint is tight,” he said.

The Federation of Icelandic Industries is calling for a broad agreement on reducing inflation, with the government, labour market and Central Bank each contributing. It says the government should exercise restraint in public finances and avoid increasing the burden on people and companies; labour market partners should protect purchasing power through stability and higher productivity rather than nominal wage increases that inflation erodes; and the Central Bank should provide clear and credible guidance on what is consistent with its inflation target.