Rising prices of land and building materials as well as labor costs will support a further increase in housing prices, assess analysts from PKO Bank Polski (PKO BP).
What may be the impact of the increase in the prices of land, construction materials and labor on the market? Given weak demand, such a situation would negatively affect developers’ margins and worsen their liquidity situation. Nevertheless, demand in the real estate market, despite the negative impact of the pandemic on the economy, remains high. In such circumstances, the increase in costs is a reason for further increases in the prices of flats offered on the primary market, without any significant reduction in the margins of developers, but it is worth adding that along with the rapid rise in prices, the demand will gradually decline. Being aware of this, developers are already locally reducing new supply on the residential real estate market. The reduction in the number of started residential investments is now particularly visible in the largest metropolises.
In the case of the first factor, the prices of land for development, in 2020 an increase of up to approx. 20% was observed. The price increases reflect the interest in purchasing land in locations of tourist value, as well as the nature of capital protection against high inflation in the conditions of low interest rates.
In the case of prices per m2 of land based on loan applications for land for development, it signals a significant (by approx. 1/5) increase in the median of this price in 2020 for plots located in urban poviats. At the end of 2020, there was an obvious differentiation – the highest level of the median was recorded in Warsaw (over PLN 500 / sqm), then in the group of capitals of other voivodeships (about PLN 230 / sqm). approx. PLN 160 / sqm) and poviats (approx. PLN 95 / sqm). In the largest agglomerations, the median price per sqm of a plot in 2020 ranged from PLN 163 in Łódź to PLN 542 in Warsaw, according to the report from PKO BP.
Secondly, the prices of building materials show an increase – by approx. 60% – in the prices of steel scrap and crude oil in the period from November 2020 to March 2021.
The COVID-19 pandemic and the related restrictions have resulted in a decline in demand and a reduction in the production of many building materials and raw materials for their production. The current increase in demand amid the increasingly clear normalization of the economic situation with the progress of vaccination requires supply adjustment. demand from China, which successfully brought the epidemic under control, and at the same time is a significant producer and consumer of many raw materials and materials.For example, this country accounts for nearly half of the global steel market – with increasing demand from China, prices of steel bars increased from August 2020 to March 2021 by Nearly 50%, and steel scrap by about 60%. Significant is also the increase in demand for construction materials in the markets of the United States and Great Britain, also those already recovering from the epidemic. Construction generates a significant demand for steel – it consumes approx. production of this raw material.
Interrupted or extended supply chains are another reason for the increase in the prices of building materials, directly related to the pandemic. Disruptions in the freight market (lack of containers for transporting materials, congestion in seaports) disrupted the flow of supplies and resulted in local restrictions on the availability of the raw material. The market’s natural reaction to the deficit is to increase the price.
Many building materials used in construction are based on petroleum products. The nearly 60% rise in crude oil prices from November 2020 to March 2021 is reflected in rising prices for plastics and plastic products used in construction, according to the report from PKO BP.
Finally, forecasts point to an increase in wages in the construction sector by more than 8% in 2021 and 2022, respectively.
“Shortages of qualified construction workers and competition for them between individual construction segments (engineering vs cubature) create conditions for an increase in wage pressure. The wage grid in construction companies is also affected by the increase in the minimum wage in 2021. In this situation, a significant increase in labor rates is expected for general construction works in the coming years (by more than 8% in both 2021 and 2022). The acceleration in wage growth is based on the macroeconomic environment. As we wrote earlier, the rapid recovery in demand for goods with supply constraints led to a strong increase in their prices. remember that a significant part of the service sector is excluded from activity due to the pandemic.
Source: ISBnews and PKO BP.
