Bad news for the housing crisis: It’s getting more expensive to build everywhere

03 Aug Bad news for the housing crisis: It’s getting more expensive to build everywhere

The cost of building continues to soar. Across North America, construction costs are up between 5% and 11% from last year, according to a new quarterly report from the property and construction consultancy firm Rider Levett Bucknall. This continues a steady upward rise in costs seen every quarter for the past five years.

The impact of this trend is that it’s becoming increasingly expensive to build homes and office buildings. The rising costs may very well signal an oncoming recession, which will likely lead many developers to stall or even cancel big projects.

“Construction is historically a cyclical industry which responds to the general pace of the wider economy,” Julian Anderson, president of RLB North America, tells Fast Company via email. “When the economy is hot and there is a lot of investment, then construction is busy. When the economy is in recession, then the construction industry will slow.”

A rapid increase in costs, Anderson says, “typically portends the end of an up cycle.”

The recent rise in costs can be attributed to a number of factors, such as supply chain issues for raw materials and construction products, labor shortages, rising fuel prices, inflation, and the broader impacts of the pandemic.

These costs are happening in every one of the markets RLB’s index tracks, including 12 in the U.S. and two in Canada. But these issues aren’t hitting uniformly, with some parts of North America seeing much higher increases.

In the U.S., costs have increased the most in the Seattle area, where there’s been an 11.28% rise compared with April 2021. Chicago, Boston, New York, and Denver all saw construction cost increases of 8% or more compared to last year. In Toronto, costs are up more than 14% from last year. The slowest rate of cost increases was seen in Honolulu, though costs there are still up more than 4.5% from last year.

One major sector where costs are rising is in housing, which Anderson says can lead both small and large homebuilders to scale back. “When the rising cost of construction outstrips increases in the sale price or rental returns, then projects get delayed or canceled,” he says.

But rising construction costs alone can’t be blamed for what may be a dampening of demand in the housing market. Anderson also points to increases in cost-of-living expenses and rising interest rates, which experts believe are making the current housing crisis worse.

“While the cost of construction is an important contributor,” Anderson says, “I rank rising interest rates as a bigger challenge.”

Source: Fast Company