Construction Costs Soar & Feed the ‘Boom’ in House Prices

9 September 2018 – El Confidencial

“A year and a half ago, I asked for a quote from a small construction company for a building project in Leganés. I drafted the plans, obtained the permit from the Town Hall and when I spoke to the construction company again about starting the work, they quoted me 35% more than we had originally agreed. It was crazy. And something similar has just happened on another project in Móstoles. I signed a building contract with another construction company two months ago, the work starts next week, but they can’t stick to the price we agreed because they can’t manage to hire workers for that price”.

The speaker is a property developer from Madrid, who prefers to remain anonymous so as to not generate hostility amongst construction companies. Over the last few months, he has suffered as a result of the significant rise in construction costs. There are severe labour shortages, which are causing prices to rise, given that the cost of construction materials, although increasing slightly, has remained much more stable.

The increase of 35% is not generalised across Spain, but it is starting to become quite frequent in cities such as Madrid, Barcelona and Málaga where real estate activity has recovered more strongly than in other parts of the country, according to the experts consulted.

To give us an idea, according to a study prepared at the beginning of the year by ACR Grupo, residential construction costs have risen by 17.5% in the last 24 months, and by 12% in the last year alone. After 2007, and coinciding with the crisis, those costs decreased by 20% and remained almost flat for more than five years until two years ago, when the long lethargy was finally broken.

This higher cost of labour has a direct impact on house prices. According to the experts consulted, a 40% increase in construction costs results in a 20% rise in house prices. And, if the price of land represents around 35% of the total cost of the construction, then construction costs now account for around 50%. “Why do you think that prices are rising so quickly in Madrid and Barcelona? The price of land is soaring and now this unexpected enemy has arrived on the scene”, said the same developer.

In the Spanish capital, prices are out of control in certain areas, with price rises of up to 20%. “…”. “Within a given development, a home that used to cost €400,000 is now being sold for almost €500,000. The increases are not only due to the fact that there is a lot of demand and limited supply, but also because if the properties aren’t sold at those prices, then the project is not profitable. Some of the listed property developers have already warned that they will not be capable of building as many homes as they had planned. We will see in a few months time whether they are going to be able to fulfil their sales forecasts”, add sources from a construction company.

Although property developers have recognised this problem publicly for months, they are also convinced that it has gotten worse over the last nine months (…).

Destruction of the production fabric

The lack of skilled labour is evident. Plumbers, framers, electricians, bricklayers, etc…And like in any market, scarcity causes increases. Many of those who used to earn their living building homes at the height of the boom have changed jobs or left the country and have no intention of returning.

The figures speak for themselves. In 2008, the year the bubble burst, 600,000 new homes were completed in Spain. Now, that number barely reaches 50,000 units. Moreover, that decrease in activity has led to the disappearance of more than 12,600 companies linked to the sector since 2012, around 6,800 construction companies and 5,700 real estate firms, according to data from PwC.

That destruction of business fabric has resulted in an enormous number of unemployed people. Whilst a decade ago, the number of wage earners linked to the construction sector amount to 2 million people, in 2017 the number barely exceeded 800,000. In other words, almost 60% of the workers have disappeared (…).

“The main problem is that people who worked in the sector before and who have now found work now elsewhere do not want to return because of the fear of another crisis…”.

The problem goes far beyond the increase in prices that the property developers end up passing onto end buyers. The severe labour shortage, together with the lack of financing, puts in danger the sector’s estimates in terms of their forecasts for the construction of homes necessary for a healthy real estate market. And no solution for that problem is likely to be found in the short term (…).

Original story: El Confidencial (by E. Sanz)

Translation: Carmel Drake

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