02.08.2021
The cost of construction in Cyprus has risen abnormally. The recent increase in diesel prices has worsened the situation as the price has a domino effect on the prices of all materials used in the construction sector.
Critical resources such as steel, cement, sand, stone aggregates and wood-based materials have risen in price over the past year, pushing up the overall cost of construction.
In addition to the prevailing demand for housing, below we classify the main factors that contribute to the increase in construction costs.
Oil
Crude oil prices have risen by about 80% since October 2020. Oil is important to the construction industry, as the production of building materials, their transportation and the operation of construction equipment depend on oil.
Increasing Home Improvement Activity and Slowing Supply
During worldwide lockdowns and semi-lockdowns, homeowners were stuck at home and unable to take vacations or pay social expenses. Inevitably, with time and money in their hands, there has been a huge increase in home renovation activity (repairing some rooms, expanding existing ones, etc.).
At the same time, quarantines are causing a slowdown in the production of materials. This caused an imbalance in supply and demand, which to some extent persists to this day.
Finally, the combination of low mortgage rates and the telecommuting trend convinced some apartment owners to buy a house, and thus the growing demand for more space has sparked further activity.
Infrastructure and electric vehicle spending plan
Around the world, there has been a surge in investment in infrastructure projects by governments (mainly the US and China). This transition is considered the safest and fastest way to create more jobs, as it offers a higher fiscal multiplier for national GDP.
We expect investment in infrastructure projects to absorb a lot of materials and thus lead to a further increase in all building materials.
In addition, the growing demand of the automotive industry and especially electric vehicles is causing a further increase in the use of materials from steel, aluminum and especially copper, which are an important element in the construction industry – pipes, plumbing, electrical wiring, heating and cooling systems.
Transport
In Cyprus, as an importing country, recent transport problems due to lack of capacity and containers (container crisis), surge in e-commerce and increased demand for transport space, lack of port labor have resulted in higher import costs and hence higher costs for the final product.
Construction costs, what’s next?
The rapid rise in construction costs impairs affordability for buyers and creates problems for developers in doing business, since their estimates can be completely wrong after the start of the project or during the development process.
While there is little scope for price adjustments on existing contracts, costs are being passed on to new projects.Thereafter, rising construction costs are causing a slowdown in sales of new homes under construction, while pushing up demand and prices for resale and turnkey properties.
Unfortunately, the rise in construction costs has come at an unfortunate time, as the large supply of homes is a solution to the existing housing shortage.
As for future construction costs, while demand is expected to continue for some time, the key question remains whether production and transportation will return to full capacity, and if so, how quickly.
In this regard, with reference to existing market expectations, we believe that construction costs will remain high for another 1-2 years, and then decrease to pre-pandemic levels during 2023. a more normal growth rate of 3%-5% per year.
