Construction cost peak is likely to have been reached
December 19, 2022
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In the space of a year, construction prices in the building sector have risen by 8.2 percent. This is shown by the Construction Price Index for October 2022 published by the Swiss Federal Statistical Office (FSO) on December 19. Compared to the last publication of this semi-annual data (April 2022), this represents an increase of 3.2 percent. The purpose of this article is to find out what is behind this increase and how construction prices are set to change in the near future..
The material price peak seems to have passed
The price of materials represent a significant part of the total cost of a building: According to value-added statistics from the Swiss Federal Statistical Office, materials and goods account for around 45 percent of expenditure. Recently, a slowdown in the price dynamics has been observed, as per the material price indexpublished monthly by the Coordination Conference of Construction and Real Estate Bodies of Public Builders (KBOB) in cooperation with the FSO. In November 2022, material prices were still 6.4 percent higher than in the same month a year earlier–however, compared with the peak in May 2022, prices have fallen by 5.5 percent. Steel prices, in particular, have decreased significantly from the very high level they reached in the first half of the year. This is due to the partial resolution of supply chain disruptions and the relaxation of China’s ‘zero Covid’ policy, which is also likely to ease the situation in the future.
Rise in energy prices slowing for the time being
According to the Consumer Price Index (CPI), energy and fuel prices were 18.6 percent higher in November 2022 than in the previous year–a very substantial increase. But while these high energy price hikes have leveled out somewhat recently, future developments are still very uncertain. For example, a particularly cold winter would lead to a relatively rapid depletion of gas reserves, resulting in upward pressure on prices. In addition, administered electricity prices for residential customers will be higher in 2023 than in the previous year.
Wage costs are on the up
Wage costs will almost certainly rise in the coming year. Although they fluctuate less than material prices, it can be assumed that this will have a noticeable effect on an increase in construction prices in 2023. Wages will rise due to the ongoing inflation and the current labor shortage which gives workers more leverage to negotiate higher salaries. Plus, the new national wage agreement (Landesmantelvertrag; LMV) between master builders and trade unions resulted in an increase in construction wages of 150 Swiss francs per month (subject to approval at the delegates’ meeting of the master builders’ association).
Economic conditions putting the brakes on construction price increases
Another determining factor for current and future construction price increases is the state of the economy. Both consumers and businesses are currently not very optimistic about what lies ahead. Growth in gross domestic product and construction prices have typically moved in a similar direction in the past. The gloomy economic outlook is, therefore, likely to dampen construction prices–particularly as price-adjusted volumes in the construction sector are also showing restraint. Due to higher interest rates, high construction prices, and supply bottlenecks, Wüest Partner anticipates a decline in new construction after inflation adjustment. The situation is different for conversions and renovations, however, which will increase due to energy improvements. In addition, construction companies are likely to generate further sales growth due to price increases.
Conclusion
In summary, the expectation for 2023 is roughly in line with the developments seen over the past six months. Thus:
- Wages will increase substantially in 2023.
- Material prices have passed their peak, which suggests a normalization of construction prices.
- While oil prices have decreased from their peak, electricity prices will increase in the coming year.
- Manufacturers are demanding higher list prices for their products.
- The economic downturn and low volume of new construction are dampening building prices.
Based on this, we expect construction price inflation to be 4.5 percent next year.