Construction boom drives up costs to record levels:
Cost increases set to even out before the end of 2021
- Some 72,000 new residential properties built in Austria in 2020. Similarly high figures expected for new builds in 2021, with demand for construction set to accelerate still further in 2021 throughout Western Europe
- Construction costs climbed to record levels at start of 2021; residential construction costs 7% higher in April than in previous year
- Steel and wood prices emerged as main cost drivers. Steel prices in Austrian wholesale market up 37% in April; timber and wooden panels up 11%
- Increase in construction costs set to at least level off in H2 as a result of improved supply of construction materials
- Planned increase in cutting capacity of sawmill industry and growth of steel production in Europe even likely to drive slight fall in prices during course of year
Following a moderate cost increase of 0.9% in 2020, intermediate goods for the Austrian residential construction sector have been getting gradually more expensive since the start of the year. Costs rose by 7% in April, with the average increase since January sitting at 4.7%. "There has not been a construction costs increase on the scale we are seeing in 2021 since the period from 2006 to 2008. Costs were also driven up by a housing boom back then, and in 2021 the situation is being exacerbated by significant construction material shortages. That said, the increase in construction costs is likely to ease off during the course of the year", says UniCredit Bank Austria Economist Günter Wolf.
It is primarily price increases for steel and lumber that are driving up costs in 2021. Steel prices in the Austrian wholesale market were up by 37% in April, with timber and wooden panels increasing by 11%. Other construction materials that represent a lower proportion of construction costs have also become significantly more expensive. This is particularly true of oil-based products such as bitumen and plastics — in the form of insulation materials and films, for instance.
Brisk construction sector production and supply bottlenecks key price drivers
Even in 2020 as the coronavirus pandemic took hold, the Austrian construction industry saw little impact; revenue from new residential construction and renovations fell only by a nominal 1–2%. Around 72,000 new residential properties were completed last year. Similarly high figures can be expected for new builds in 2021 given that the volume of building permits issued as at the end of 2020 was up 15% on the average for the last ten years. Throughout Western Europe, demand for construction is set to accelerate still further in 2021. Residential construction in Austria will also continue to derive momentum from the focus on renovations, which in the coming years will involve mainly energy-related projects. Based on data gathered in the economic survey for Q2 2021, the number of consumers planning to renovate their homes in the next 12 months is at a record high. Demand is not likely to fall in the short term, and residential construction costs are therefore unlikely to ease.
Alongside the high demand for construction services, delays with construction material supplies have been a reality for some months now. In May 2021, a record 36% of Austrian construction companies surveyed as part of the monthly EU economic surveys cited material shortages as a major obstacle to production. Although many EU countries experienced worsening shortages of construction materials in 2021, Austria and Germany felt the biggest impact (in May, some 34% of construction companies complained of a lack of materials, compared with the EU average of 11%).
High demand for construction is driving the supply difficulties currently experienced in relation to many building materials, with certain special factors exacerbating the situation. As a result of the economic downturn in 2020, there was a global shutdown of production capacity in the steel industry and the sawmill industry; it was not possible to ramp up capacity again quickly enough to respond to the rapid recovery in demand. In addition, demand for German and Austrian timber from outside Europe—primarily the USA and China—rose sharply in 2020 and has continued to do so in 2021. These markets account for some 25% of all timber exports from Germany and around 8% of those from Austria.
Supply bottlenecks and cost increases likely to ease in H2 2021
Demand for construction is not expected to tail off in any meaningful way in 2021 in the residential renovation and new builds sectors, either in Austria or in Western Europe in general. The supply of construction materials should improve over the course of the year, however. The cost of construction materials is also likely to ease, albeit only slightly.
The top 20 sawmills in Europe intend to increase output by at least 6% in 2021. This figure is much higher than in the previous five years, during which cutting capacity only increased by an average of 3% per year, according to a survey conducted by Holzkurier. The German sawmill industry, which is the largest timber-producing sector in Europe, has already reported an 18% increase in production for Q1 2021. The decline in the US lumber futures market further fuels expectations of a downturn in wood prices. Accordingly, the prices for deliveries of sawn softwood for July 2021 have reportedly fallen by more than a fifth since the record high in May, and prices for contracts scheduled for July 2022 have recently fallen by more than half (source: Chicago Mercantile Exchange).
The construction industry can also expect to see supplies of structural steel improve over the course of 2021, although steel prices are expected to increase slightly in the coming months in the face of continuing high demand. After a brief price correction in March, structural steel has become somewhat more expensive again in Europe in the last two months. Nonetheless, the European Steel Association still expects prices to ease slightly in 2021, as supply catches up with demand. Businesses are confirming in their production expectations for the next few months that they anticipate a significant increase in output from the European steel industry in H2: In the May survey, the number of steel producers in the EU expecting production to grow outweighed those with a less-optimistic viewpoint by a third. Not since 2011 has the figure been this high.
"The futures prices for structural steel on the London Metal Exchange also suggest that prices are likely to ease during the course of this year. By the start of June, contracts for steel deliveries at the end of 2021 were on average 10% lower than they had been in mid-May", concludes Wolf.
Further information can be found at: https://www.bankaustria.at/wirtschaft-online-wirtschaftsanalyse-oesterreich.jsp, UniCredit Bank Austria, June 2021
Enquiries
UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0)5 05 05-41954;
Email: guenter.wolf@unicreditgroup.at