Global construction costs will remain under pressure into 2023 as ongoing strength in demand coincides with supply side impacts from COVID and the Ukraine war, a leading research firm has predicted.
In its latest report, Oxford Economics said construction costs around the world would continue to be subject to pressure going into 2023.
It warned that the consequences could include cost overruns, project delays and cancellations and more construction insolvencies.
“Government stimulus will ensure demand for construction activity will remain strong over the coming years, while supply side disruptions are set to hamper industry capacity,” Oxford warned.
“The mismatch between supply and demand point to construction costs remaining high into 2023.”
According to the report, construction costs surged during 2021.
In the residential sector, costs associated with building a single detached home jumped by anything from just over five percent across the European Union to almost 25 percent in Canda (see chart).
Going forward, Oxford says several factors will drive ongoing pressures.
First, the upswing in global construction activity is set to continue as governments around the world have responded to the pandemic by fast-tracking major infrastructure works.
In the US, the Infrastructure Investment and Jobs Act provides US$500bn in new spending on highways, railways, bridges and other infrastructure over the next decade.
In Europe, the European Union’s Next Generation EU fund will support a wave of renovation and refurbishment activity as the EU works towards decarbonising the continent’s building stock.
In Asia, China is set to undergo an infrastructure boom as the authorities look to capital expenditure and public projects to help offset the real estate downturn and aid economic recovery following the Shanghai lockdown.
At the same time, international supply chains remain stretched as strong consumer and industrial demand for goods has led to a shortage of shipping containers and a jump in container rates.
Such disruptions have intensified following the 2022 Shanghai lockdowns and the conflict in Ukraine.
Going forward, BIS warned that these disruptions will persist into 2023 notwithstanding an improvement in the Shanghai situation as sanctions on Russia are likely to continue even if the conflict is resolved.
In addition, a shortage of labour can be seen through an unprecedented number of construction job vacancies (see chart).
Here, Oxford expects shortages to impact various regions differently.
Whereas worker shortages may begin to ease in migrant dependent locations such as Singapore, Malaysia and the United Arup Emirates as migration returns, places such as Germany and the Benelux countries face structural worker shortages that are unlikely to abate without an increase in migration or a sustained burst in productivity.
Should this not materialise, companies in these countries will either need to pay more to attract workers or delay work on projects.
In its report, Oxford suggests that above factors will see cost pressures sustained into 2023.
Whilst strong construction cost growth has historically been followed by a correction in prices, the report warns that this may not happen this time around on account of the ongoing strength in demand.
It warns that the consequences could be serious.
“Periods of high input cost inflation typically lead to project cost overruns, project delays, and project cancellations” the report warns.
“We are already seeing a growing lag between building approvals, commencements, and completions in a number of geographies, and also an increasing drop out rate as a growing number of approved projects are delayed or abandoned.
“Historically, periods of high price growth are usually followed by a period of relatively flat price growth, as the gradual correction comes through in real terms. Ultimately, higher prices encourage a supply response, as higher wages attract more workers to the construction sector and stronger material prices encourage suppliers to bring more capacity online. The strong global demand for construction activity over the coming years ensures that the supply side response to high prices is unlikely to create a ‘whipsaw’ effect, whereby we see a sharp fall in construction costs.
“A prolonged period of construction cost inflation threatens to overshadow the upswing in activity and reduce the efficacy of government stimulus. From a social perspective, higher costs erode the cost-benefit equation for the delivery of new infrastructure; while from the construction company’s perspective, high input cost inflation risks creating a profitless boom. We have seen a growing number of construction company insolvencies in the face of rising costs – particularly for firms which are locked into prices that were fixed up to a year ago – and there are likely to be more to come. The challenge for the construction industry is limiting potential contagion effects of these failures, as unpaid suppliers and subcontractors themselves face further hardship.”