/

Construction costs to remain high until 2023

6833 views
5 mins read

By Charalambos Pitros

The construction cost in Cyprus has increased abnormally. Moreover, the recent hike in diesel prices has worsened the situation, as the price has a domino effect on every material used in the construction sector.

Crucial inputs such as steel, cement, sand, stone aggregates and wood-oriented materials have seen a price increase in the last year, pushing up the overall construction cost.

Below we categorize the main factors that contribute to rising construction costs.

Oil

Crude oil prices have shot up around 80% since October 2020.

Oil is essential to the construction industry since the manufacturing of the building materials, their transportation, and the construction site machinery operation are all dependent on oil.

Home Improvement Activity

During the word-wide lockdowns and semi-lock downs, homeowners were stuck at home, and they were unable to take vacations or make social expenses.

Inevitably, with time and money on their hands, there was a huge increase in the home remodelling activity (renovations of some rooms, extensions of current ones etc.).

At the same time, the lockdowns caused a slowdown in the production of the materials.

This caused an imbalance of supply and demand that remains to some extent.

Finally, the combination of low mortgage rates and working remotely persuaded some apartments owners to buy a house.

Thus, the increasing demand for bigger space caused further activity.

Infrastructure Spending Plan

There is a worldwide spike in investment in infrastructure projects by the governments (mostly the USA and China).

This shift is considered the safest and fastest way to generate a lot of employment while offering a higher fiscal multiplier on a nation’s GDP.

As we look forward, the investment in infrastructures projects is sucking up many materials and thus will cause a further increase in all of the construction materials.

Moreover, the growing demand of the car industry and especially the electric cars are causing a further increase in Steel, Aluminium and especially Copper, which is an essential element in the construction industry in pipes, plumbing, wiring, heating, and cooling systems.

Transportation

Being an importing country, the recent transport issues due to capacity constraints, shortage of containers (container crisis), a surge of electronic commerce, an increase in the demand for transportation space and a port labour shortage are causing higher importing costs and thus higher final product costs that are passed to the consumer.

What’s Next

The rapid increase in construction costs is worsening the affordability for buyers.

At the same time, it creates business issues for developers since their estimates may be completely off once the project starts or during the development process.

While there’s little room to adjust pricing for existing contracts, costs are being passed on for new projects.

Following this, the increasing construction costs are causing a slowdown in the sales of the off-plan new homes while it boosts demand and prices for the resale and key ready properties.

Unfortunately, the rising construction cost came at a bad time since a strong supply of houses is the solution to the existing housing shortage.

Regarding the future of construction cost, although demand is expected to hold up well for some time, the key determinant is whether and how fast the production and transportation will actually return to their full capacity.

In this respect, regarding the existing expectations of the market, our view is that construction costs will remain high for another 1-2 years and then drop back to pre-pandemic levels within 2023.

By that time, constructions costs will moderate at a more normal increase pace of 3% – 5% per year.

Charalambos Pitros is a Member of the Royal Institution of Chartered Surveyors (MRICS) and European Real Estate Society (ERES). He is a Real Estate Investment Consultant and Valuer at Zyprus | Property Valuers & Estate Agents. www.Zyprus.com