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Building cost inflation at single-digit growth

Wednesday, February 4, 2009

Interesting reading regarding the overall health of the building industry has been the deceleration in building-cost inflation.

In the fourth quarter of 2008, building-cost inflation, as measured by the BER BCI, is expected to have waned to a rate of roughly 6% compared to the same quarter a year earlier.

‘Building costs are reacting to the deteriorating economic situation,’ says Erwin Rode. ‘In other words, the building cycle is very exposed to the economic cycle and in fact reflects a truer economic situation than even the CPI. The question on everyone’s minds now is whether we can expect a turnaround in fortunes during 2009/2010?’

All things being equal, believes Rode, the single-digit growth in building-cost inflation could be a shot in the arm for the building industry: ‘Three factors affect growth in building costs. The first of these is material costs, which are now going to moderate because of lower demand and lower fuel and transport costs. The second is wages, which are also under pressure because of less building activity. And the third is building contractors’ profit margins, now equally under pressure because of keener tendering competition.’

‘Of course’, says Rode, ‘the low rate of building-cost inflation will make the development of new non-residential property slightly more viable, considering that market rentals are, in general, still growing at double-digit rates.’

The news is not as rosy for the residential sector, however. Comments Rode: ‘It doesn’t help new residential developments as this market is still affected by other factors, not least of which is the fact that while costs are growing by only 6% per annum, the most recent indicator from Lightstone is that average house-price growth is currently slightly negative.’

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