Volatile construction prices

Construction prices have risen noticeably in recent months. Between October 2020 and April 2021, they rose by 1.5 percent in Swiss building construction, the largest half-year increase since 2008. The prices of individual building compo­nents rose even more sharply. For example, the price of wood on commodity exchanges in mid-June 2021 was more than twice as high than that of previous years – even though prices had fallen slightly in the first half of June 2021 (see also https://www.finanzen.ch/rohstoffe/holzpreis). Although the prices on the exchanges fluctuate more than those actually paid for roof trusses and furniture, it is clear that the construction market is in a turbulent phase.

Higher building prices 

Many building materials have become more expensive, and in some cases, supply bottle­necks are to be expected. This is due to an interplay of several factors:

• The increase in demand, accel­erated by catch-up effects, partly met with supply chains that were not fully functioning.
• In view of the economic uncer­tainties in the previous year, many producers were reluctant to replenish their stocks.
• In the USA, for example, the economic upswing was further accel­erated by invest­ments in infra­structure and rising house prices.

Construction prices and other trends

We expect many of these devel­op­ments to normalise in the near future. At the same time, some trends that had already caused changes before the pandemic will become more noticeable again.

• The use of wood as a building material will continue to increase. The price increase here partly reflects the popularity of the raw material. This price increase sets the incentive for more construction timber to be produced in the future and for the Swiss “forest timber” value chain to become better organised. This capacity expansion takes time, but will subse­quently give additional impetus to timber buildings, which are partic­u­larly sustainable when produced locally. With regard to the price compet­i­tiveness of timber buildings with solid buildings, it should be noted that the pure material costs only make up a small proportion of the total costs. Therefore, the current price increase of wood will not have the same effect on the prices of timber buildings. 
• In the construction industry, discus­sions about margins and prices are omnipresent. In view of low margins, there is little scope to generally factor in reserves for changing material prices when setting prices. Who bears the material price risk depends on the project status and the respective contract design. Thus, agree­ments on who is respon­sible for what will increase. For instance, at present, general contractors offer the client cost security. In turn, in the case of subcon­tracts that have already been awarded, these general contractors have outsourced the risk to the executing construction company. These, in turn, have partially hedged the prices with the suppliers. However, in the current situation there are also some building owners that are accom­mo­dating and willing to share parts of the additional costs, which result from material price increases, with construction companies that they have long-standing working relation­ships with.
• Sensi­tivity to fluctu­a­tions in material prices is likely to increase again. It is true that the current situation is excep­tional in terms of the extent of the price increase and the amount of materials affected, especially in combi­nation with supply bottle­necks. However, it should be noted that certain price fluctu­a­tions are common­place. Recent devel­op­ments bring back memories of ten years ago, when signif­icant fluctu­a­tions in exchange rates shaped the cost of imported building materials.
• Building is tending to become more expensive. This is because the require­ments for properties are expected to contin­u­ously increase, for example, in the areas of fire safety, earth­quake risks or sustain­ability.