The cost of building materials – iron, wood, plastics, aluminium, copper and concrete – has been rising for months all over the world. This has two immediate effects: the first, that the promoters will earn less with the flats they have already sold; the second, that those who take out from now on will be more expensive. “If this trend is consolidated in the future, it could end up moving to the final price,” says Pedro Soria, commercial director of the appraiser Tinsa. “In that case, it remains to be seen if the market can assume it, or if it is the promoter who must support it within their margins”.
The reformers, who live a golden age after the confinement, are in the same: or assume the rise or modify budgets upwards. “Lumber has gone up 70% since the beginning of the year. I gave a budget for a porch and had to raise it,” says the cabinetmaker Angel Otero. “Either you lose your word or you lose your money. As he was a good customer, I did it and I lost money”.
In Spain, the rise in costs can already be seen in the official data of the Ministry of Transport. The following graph shows the evolution of prices since 2006, taking into account only materials and not labour.
The ACR group produces its own construction cost index and in June warned of an overall rise of 9.6% since January. By item, the biggest year-on-year increases (between May 2020 and May 2021) were in foundations and structure, which act as a leading indicator, joinery and glazing.
This is not an entirely unusual situation, although the largest recent rise in recent memory is the cost of workers before the bursting of the housing bubble and now remains stable.
“We experienced that in 2008. Labor was scarce because everyone was promoting and prices were rising,” acknowledges Sergio Serrano, CEO of the construction company Caledonian. “But globally you didn’t have this problem. I’ve been in the sector for twenty years and I’ve never seen this. Every year there are measured rises, 3% or 4%, but now they are 40% from one month to the next.” </p
What is happening? As explained by SEOPAN, the Association of Construction Companies and Infrastructure Concessionaires, “this inflation, which already occurred in crises such as the steel crisis of 2006 or the oil crisis in the 70s, is caused by the increase in demand in the heat of the economic recovery, the slow improvement in production capacity worldwide and the significant rise in the cost of maritime transport”.
The recovery has hit the construction sector hard and it has encountered a problem of shortage of supply. Analysts believe the situation is transitory and will moderate as normality returns. “A lot of people have decided to renovate their homes and there is a bubble locally,” says Serrano. “I think the market will stabilize when the street breathes that we have returned to normality.”
Danger in the deadlines and reflected in the price of housing
Until then, the most affected are the builders, new developments and public works
“That materials rise in price is a stick for construction,” acknowledges a source of a Spanish real estate developer. “The numbers of the promotions are made with static prices considered in a ratio. And in tenders usually go to the lowest price. Several construction companies are asking for help: they made budgets with materials that they had not yet contracted and that have gone up. If this happens a couple of times nothing happens, but if it happens with many materials or items it gets out of hand. And the construction company can not stand it.
From Seopan warn about the “serious” impact caused by the rise in companies and call for a special rule to resolve the situation. They claim that the official indexes do not reflect the real evolution of prices – according to the indicators they handle, steel has risen by 70% in a year, metals by 45%, bitumen for bulky mixtures by 85%, copper by 92% and aluminum by 56% – and that some contracts and deadlines are in “danger” because contractors must face the increases.
The revision of prices in public works contracts is not mandatory and must be justified in each specification. Thus, Seopan asks to review the works in progress and incorporate a mandatory review clause in new contracts. In a recent tribune, its president Julián Núñez also advocated for “extensions” and “compensations in the works that are already in progress” for the construction companies.
Reformers and companies working in private construction are getting around the situation by fronting the money. “That’s what we’re doing,” says Caledonian’s Serrano. “But always with a margin of time, we can’t advance so much money. What we do in materials such as wood or iron is to give a signal and that we reserve that price before the rise. The supplier gives you deadlines and says: in two months you have to have it”.
Caledonian has several promotions underway in Madrid, Malaga and Ibiza. With those that are already sold there is not much to do. “We make a project and, before starting the work, we calculate what it is going to cost us with the prices at that moment. With this unforeseen event, our business is being a little less profitable. But you can’t lower it,” says the CEO.
With respect to the new work, whose cost is not only higher but grows above the second-hand housing, there are different opinions.
The commercial director of the appraiser Tinsa, argues that the effect will not be immediate. “The promotions already started have closed contracts for the execution of the work. Those who may suffer a narrowing of margins are the contractors, who may have difficulties if they do not have enough financial lung,” he says. “It remains to be seen whether it will last or moderate”.
Other sources consulted also point out that the rise in the price of materials causes the rise in other costs that are calculated on a percentage basis, such as fees and licenses. From the Association of Real Estate Developers of Madrid are clear. “If the situation continues, it could have an impact on the projects that will be launched in the coming months,” says the general director, Daniel Cuervo, in statements to elDiario.es.