Real Construction Costs to surge again
The real construction cost activity since 2001 has brought with it the strongest rise in real construction costs since the late 1980s. In real terms, to the general rate of inflation in the economy, this period has actually been higher than the cost increases of the 1980s.
It is not surprising that real construction costs are at a very high level at a time when construction activity in Australia and other parts of the world is also running at record highs and still rising.
We expect real construction costs all over the world to surge once again over the next 12 months, as construction cost continues to climb to new record highs. Total construction costs increased by 4.2 per cent over the year to June 2007. Macro monitor is forecasting the rate of increase to accelerate to over 6 per cent in 2008. Non-residential construction costs are expected to increase by more than 7 per cent in 2008.
Looking at individual cost categories; labor costs are going to be the strongest contributors of cost increases over the next two years. Previously, materials prices were increasing more, driven in particular by increasing world metals prices. Steel, aluminum and copper are all important to construction and all experienced big price increases on world markets over the 2004 to 2007 period.
Over the past four years to June 2007, real construction costs increased by 6.5 per cent per year. In the year to June 2008, materials costs are forecast to increase by 4.4 per cent. Wages costs increased by 4.7 per cent on average over the four years to June 2007, but are now expected to increase by 7.5 per cent in the year to June 2008. Falling productivity, the increase in labor costs will be close to 12 per cent, on our forecasts.
Looking longer term, the cost in the construction sector is expected to ease considerably once the level of activity stabilizes. Our forecasts this will happen during the 2009/10 to 2011/12 period. Once the demand for labor and all of the other inputs start to fall, the relentless upward pressure on costs will be alleviated. Overall forecast to be declining in real terms by 2010/11.
What does all this mean to you the business owner that owns his own building? It should stand out to you of a prime example of the fluxuation of construction cost over even a short period of time. You need to have your building appraised on a regular basis so that you are not either paying to much or not enough insurance for your building on replacement, rebuilding or the real construction cost of your building. Official Asset appraisers can help you value your assets, contact us now.
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