Building costs go sky-high

Rapidly rising building prices could begin to distort demand and supply patterns in the property market, cautions ERA South Africa group CEO, Gerhard Kotzé.

“Building cost inputs are rising rapidly – and in most instances well beyond the inflation rate. Indeed, the Bureau for Economic Research (BER) has reported that building costs rose 13,5 percent in the last quarter of 2004, although the CPIX inflation rate for December was just 4,3 percent.

“And this scenario does reflect, to some extent, a correction of the situation before the onset of the current building boom, when the construction sector was in the doldrums and both suppliers and developers were forced to keep a tight lid on price increases.”

There are obviously few such constraints at present, with demand for cement having risen 18,2 percent in the first 11 months of last year according to the Cement and Concrete Institute, brick sales last year being the best since 1989 according to the Brick Association, and excellent financial results being reported by building material manufacturers and suppliers.

There is a danger, however, that rapid increases in building costs could engender consumer resistance and ultimately cause a further narrowing of the traditional price gap between established and newly built homes. The latest Absa figures show that the nominal price difference between new and existing houses was about 12,8 percent in the fourth quarter of 2004 - the smallest difference since the 13,1 percent recorded in the fourth quarter of 1989.

What is more, the price difference between new and existing houses has shown a steadily declining trend since the first quarter of 2003, when it reached a record high of 31,4 percent.

“Such declines in the differential generally occur,” Kotze explains, “when consumers resisting high building costs decide to buy pre-owned rather than newly-built homes and cause prices in the pre-owned sector to rise steeply as demand exceeds supply.

“And there is historic precedent for what I believe could now be happening. Absa research shows that, at the peak of the property boom in the early 1980’s, the price differential between old and new homes had declined to almost zero.

“And as a concerned observer and participant in the property industry, the ERA group would suggest that there is a need for caution now as regards the potential impact of rising building input costs.

“If the market is to grow on a sound basis, the overall plateau of prices needs to move upwards on a broad, steady basis, maintaining the new-to-old price differential, and it makes sense for material suppliers and contractors not to kill the golden goose as it were.”

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