Construction costs continue to rise but stability is on the horizon

Construction costs continue to rise but stability is on the horizon
Photo by Roselyn Tirado on Unsplash

Construction and engineering costs continued to climb in July and are expected to keep rising through to the end of the year, according to IHS Markit, an information provider for major industries and worldwide markets.

July marks the seventh straight month of price increases for all categories under the materials and equipment sub-index, they say, and the ninth consecutive month in increased construction and engineering costs overall.

The result is sky-high quotes for home improvement projects, and, predictably, the coronavirus pandemic is to blame.

“Covid has just created this huge mismatch in supply and demand,” Frank Hoffman, Consulting Principal with Markit, told The Brussels Times.

“Disposable incomes - the amount of income people have to spend aside from rent, groceries, and other necessities - have increased for many people since the beginning of Covid, because they’re spending less on commuting, and a lot of their other service spending, or outlets they used that money for - concerts, travel, that sort of thing - you can’t do any of that.”

Instead, people are putting that money towards goods spending, ramping up demand for things like timber and building materials.

“One category in particular where we see this is home improvement,” said Hoffman.

“It kind of makes sense: you're spending more time working from home. You’ve noticed that the cabinet's wobbly, but now that you’re home all the time, it’s really starting to bother you.”

The market for building materials and supplies grew 14% during the pandemic last year, according to market analysis, and will grow another 10% this year.

“Home improvement and projects around the house are one thing, but then housing is something completely separate,” Hoffman explained.

“As people start to think about what the new normal might look like, it's probably going to involve a little bit more remote work - maybe still going into the office, but not as much. So all of a sudden, while two or three bedrooms seemed sufficient before, now people are thinking, ‘Well, I really do want that extra room for an office.’”

And as demand shifts for bigger houses and apartments, that translates into demand for more materials.

While the US has seen the highest jumps in costs (the price of framing timber quadrupled to its peak there), Western Europe has faced similar imbalances in supply and demand.

In Belgium, for example, the price of timber grew by 29% year on year.

“Fundamentals in Western Europe, and even all around the world, aren't quite as tight as they have been in the States, but you can't have lumber increase four times in one place and then not do anything anywhere else, so that’s had this ripple effect,” Hoffman said.

The demand came before supply could respond, but as prices exploded, more and more producers wanted to get in on the action, and buyer resistance to those high price tags for home improvement projects grew, too.

Combined, the two factors prompted a collapse in pricing in the US.

Europeans have cause to be hopeful, too.

“Movement in European pricing lags a month or two behind the US, so that should start to ease over the next couple months and provide some relief to folks looking to build or have any projects done,” Hoffman said.

Still, while the price of materials is expected to eventually return to more normal levels, there could be surprises when it comes to labour, depending on how the pandemic progresses.

“We've heard anecdotal stories of labour shortages in certain areas,” Hoffman said, and the subcontractor labour index already recorded a 4.4 index point rise from the previous month, according to figures.

“Our sense is that in Western Europe in particular, a lot of construction labour tends to be more migrant, and so with Covid and especially the Delta variant happening now, it seems like they’re at risk for certain pockets of labour shortages that could lead to either temporary increases in wages, or delays in building.”

Apart from labour and the more obvious building materials, the price of products such as semiconductors and passive components has also increased, according to IHS Markit.

There’s price pressure for printed circuit board assemblies (which are the most severely affected), semiconductors, copper, bare printed circuit boards, resistors, capacitors and connectors.

Prices for these materials are expected to keep rising by more than 10 percent over the second half of the year.

Relief might not come until 2022 and 2023, when prices are expected to stabilise after capacity expansion balances supply and demand.

Shipping is another aspect of building and construction that has been negatively affected by the coronavirus pandemic.

The costs of ocean freight from both Europe and Asia to the United States have risen.

The sub-indices for electrical equipment and transformers also remained high in July, with both recording index levels of 72.2.

There have also been longer lead times for cement and timber.

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