The construction cost in Cyprus has increased abnormally. The recent hike in diesel price has worsened the situation, as the price has a domino effect on prices of every material used in the construction sector.
Crucial inputs such as steel, cement, sand, stone aggregates and wood-oriented materials have seen a price increase in the last one year, pushing up the overall construction cost.
Apart from the prevailing housing demand, below we categorize the main factors that contribute to rising construction costs.
Crude oil prices have shot up around 80% since October 2020. Oil is essential to the construction industry since the manufacturing of the building materials, their transportation and the construction site machinery operation are all depended to oil.
Increase of home improvement activity and slowdown in the supply
During the world-wide lockdowns and semi-lock downs, homeowners were stuck at home and they were unable to take vacations or make social expenses. Inevitably, with time and money on their hands there was a huge increase in the home remodelling activity (renovations of some rooms, extensions of current ones etc.).
At the same time, the lockdowns cause a slowdown in the production of the materials. This have caused an imbalance of supply and demand that remains up to today in some extent.
Finally, the combination of low mortgage rates and the trend of working remotely persuaded some apartments owners to buy a house and thus the increasing demand for bigger space have caused further activity.
Infrastructure spending plan & electric vehicles
There is a worldwide spike of investment on infrastructure projects by the governments (mostly USA and China). This shift is considered to be the safest and fastest way to generate a lot of employment while it offers the higher fiscal multiplier on a nation’s GDP.
As we look forward, the investment on infrastructure projects is sucking up a lot of materials and thus will cause further increase in all of the construction materials.
Moreover, the growing demand of car industry and especially the electric cars are causing a further increase in the usage of the materials of steel, aluminium and especially copper, which is an essential element in the construction industry in the form of pipes, plumbing, wiring, heating and cooling systems.
Being an importing country, the recent transport issues due to capacity constraints, shortage of containers (container crisis), surge of electronic commerce and increase in the demand of transportation space and port labour shortage are causing higher importing costs and thus higher final product costs that are passed into the consumers.
Construction costs what’s next?
The rapid increase in construction cost worsening the affordability for buyers while for developers it creates business issues since their estimates may be completely off once the project starts or during the development process.
While there’s little room to adjust pricing for existing contracts, costs are being passed on for new projects. Following this, the increasing construction costs are causing slowdown in the sales of the off-plan new homes while it boosts demand and prices for the resale and key ready properties.
Unfortunately, the rising construction cost came at a bad time, since a strong supply of houses is the solution to the existing housing shortage.
With regards to the future of construction cost, although demand is expected to hold up well for some time, the key determinant is whether and how fast the production and transportation will actually return back to their full capacity.
In this respect, with reference to the existing expectations of the market, our view is that construction cost will remain high for another 1-2 years and then drop back to pre-pandemic levels within 2023. By that time, construction costs will moderate at a more normal increase pace of 3% – 5% per year.
About the author
Charalambos Pitros is a PhD holder in Real Estate Economics and Member of the Royal Institution of Chartered Surveyors (MRICS) and of the European Real Estate Society (ERES). He is a Property Valuer at Zyprus | Property Valuers & Estate Agents.