Building material prices are soaring at a record pace! How much will rising construction costs affect your project?

Property research firm CoreLogic recently released its New Zealand construction cost index (CCCI), which measures the cost of building a 'standard' three-bedroom brick-and-tile house in different regions. In this year's second quarter, ending in June, quarterly growth accelerated from 2.4% in the first quarter to 2.6%. Annual growth rose from 7.3% in the previous quarter to 7.7%, the highest recorded since data collection began in 2012.

 

CoreLogic chief property economist Kelvin Davidson says this is the fastest growth in New Zealand's CCCI seen in a decade. Given continuing shortages of building materials and labour, he expects no meaningful relief from building material price pressures for at least the next few quarters. Meanwhile, strong demand for new homes is reflected in record numbers of building consent applications, expected to hover around 50,000 a year. More than half are for smaller, medium- and high-density housing projects, such as townhouses. Davidson believes that although these smaller homes require relatively fewer building materials, the number of such projects currently under construction suggests demand for materials and labour will remain high.

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John Bennett, manager of CoreLogic's construction cost estimation division, says costs across the various categories, including labour, materials, plant hire and subcontracting, have all risen rapidly to differing degrees. He believes the adverse effects of rising prices for basic materials such as metal and timber are flowing through to related products. These increases have directly pushed up purchase prices for everything from garage doors to kitchen cabinetry. He also notes that pressures beyond material prices continue to affect the construction industry, with labour and construction management costs having a substantial impact on total building costs. Crucially, labour accounts for 40% of the CCCI. Labour costs are rising alongside material prices, but at a slightly different pace. He explains that this is one reason the overall construction cost increases shown by the CCCI are slower than many people perceive.

 

Johnny Calley of Tauranga-based Calley Homes says this is a difficult time for builders and their clients, with uncertainty and the pace of cost increases putting everyone under pressure. Historically, he says, building costs have risen each year and rarely fallen. It seems nobody has previously experienced falling costs, particularly amid material shortages and supply delays. Many people are watching the weak property market and hoping construction costs will fall with it. But that will not happen unless the market crashes or demand collapses completely. He believes demand remains because New Zealand still has a housing shortage, although some people have already noticed a substantial fall in enquiries about new homes. In his view, this will help ease pressure on building material supply chains and stabilise cost increases. Prices will not become cheaper, but there will be more choice in the market. Rising costs in the short term will put greater pressure on construction companies over the short to medium term, and those unable to adapt quickly will struggle. He suggests that engaging early and communicating well with clients, the entire supply chain and everyone involved in a project is the most effective way for businesses to achieve the best operating model.

 

Signature Homes chief executive Paul Bull says that although cost increases have hit the industry hard, the pace of growth has begun to slow and will eventually stabilise. Rising material costs may also dampen demand and force developers to price land more competitively to avoid being left holding large numbers of unsold development sections. With luck, more competitive land prices could offset rising construction costs, minimising the impact on end buyers. However, he says many builders are struggling to control costs and secure enough materials. Unfortunately, some companies will pass costs on to clients, leaving them with hefty bills. His company's construction costs are very transparent to clients, making it easier for them to make well-informed decisions.

 

Looking ahead, Kelvin Davidson says he would not be surprised to see double-digit CCCI growth before cost pressures ease in 2023 as builders' workloads slow. He is more confident than before about the construction industry's prospects. He believes current bank LVR lending rules and the tax system generally favour new home construction and development for both owner-occupiers and investors. Demand for new homes should therefore remain at a relatively high 'normal' level, and developers should feel confident about the future market.

 

Are many of our excellent Chinese-owned building companies facing the same difficult situation with rising material costs, or do they have their own solutions? YIJU contacted representatives of two Chinese-owned building companies for in-depth commentary.

 

 

Q: Have you noticed building material prices rising too quickly recently? Are any categories of materials in particularly short supply?

 

Jacky Li：I think recent material price increases and shortages have actually eased compared with the start of the year. However, there is still no sign of prices stopping their rise; I can only say the pace of increase has slowed. Current material cost increases are still concentrated in two main areas: structural timber and exterior cladding materials.

 

Peter Niu：We feel that building material prices in the market are continuing to rise, and we are still going through this painful process.

 

 

Q: Do you think this has had a significant impact on your construction schedules? What measures have you taken to ease material shortages and high prices?

 

Jacky Li：It has had little impact on us. We have been working in the construction industry for more than a decade and have maintained very good, close relationships with suppliers and subcontractors. We work even more closely with them to manage rising material prices and shortages, allowing us to monitor prices and supply requirements in real time. Naturally, we also reward our suppliers' and subcontractors' cooperation with more orders.

 

Peter Niu：It is still having a far-reaching impact on project costs and schedules, but we feel many building contractors have become numb to it. After all, it has been going on for a long time, since the start of Covid. To ease these problems, we first need to understand their causes: 

 

1. Inflation and rising international raw material prices. This is difficult to resolve at every level.

2. Covid-related transport and production capacity problems. These can be addressed through early contractor involvement (ECI) at the design stage and a more detailed construction programme prepared by the project manager. This helps projects avoid products facing steep price rises or shortages in advance, or order products early in line with the project schedule, for example, structural steel, retaining walls and exterior cladding products.

3. Owners should plan project start dates early. For example, postponing the start can leave enough time to avoid the effects of building material issues.

1. Allocate the construction budget evenly at the start of the project to reduce the risk of a cash flow shortfall.

 

Q: What is your outlook for the building materials market over the coming period?

 

Jacky Li：I expect material prices to gradually settle into steady growth in the second half of this year, without sudden, substantial increases. As the market cools, the balance between material supply and demand is beginning to loosen. Achieving a true balance will still take time, but this is at least a good start. We expect that, at the earliest, supply and demand could return to balance early next year, with building material supplies gradually returning to normal. Unfortunately, most material prices are unlikely to return to their previous levels.

 

Peter Niu：We remain relatively cautious about the building materials market over the coming period. The key point is that prices are still rising, with no significant signs of slowing. However, stronger government action could bring some improvement in certain areas, such as GIB products.