After soaring since the pandemic, the cost of building materials and labour finally seems to be falling. But it may be too late to save many subcontractors, many of which now appear to be on life support.
Average prices of housebuilding materials have risen by 38% since developers were allowed back on sites after the first lockdown in mid-2020, only stabilising around May, according to government statistics. That compares with 21% for overall inflation. Construction sector wages weren’t far behind, up 34% over the same period, against 26% for the entire workforce.
Two great forces have driven both the increase and now the somewhat more modest retreat. Demand for homes was stoked by then chancellor Rishi Sunak’s stamp duty holiday. The need for materials was even greater for other new construction, which leapt by 47%, thanks largely to HS2.
On the supply side, the driving force was a near quadrupling in oil prices, inflated by supply chain constrictions and Russia’s invasion of Ukraine, hitting energy-intensive basics from bricks to steel, as well as transport. For labour, soaring inflation forced housebuilders to lift wage rates and make hefty one-off cost-of-living payments.
This – and rising incentive levels for buyers – helped suppress housebuilders’ margins, but, so far, does not appear to have been widely reflected in falling land prices.
Since May, however, the tide appears to have turned – a bit. The official data shows a 1.4% reversal in housebuilding material prices. For other new work, costs have declined 4.6%, proving what goes up furthest may well come down most.
I’ve always been a bit sceptical about just how closely the statistics from the Department of Business and Trade reflect how either giant brickmakers or the cash-strapped local builders’ merchant will react to prevailing economic conditions. Housebuilders have differed in their assessment. The UK’s biggest housebuilder, Barratt, predicted in its results in September that total build costs will rise in its financial year to June 2024, by about 5%; some materials are coming down, but cost of labour “has been a bit more sticky”.
Vistry – rapidly catching up on Barratt’s volumes following its acquisitions of Countryside Partnerships’ and Galliford Try’s housebuilding businesses – has taken a more aggressive stance. In October, it wrote to its subcontractors seeking 10% discounts on existing contracts from January and all new ones going forward. Vistry argued that its new partnerships model, which involved greater volumes and forward pipelines by building homes for third-party investors, would give subcontractors greater visibility. A fair point, but specialist contractors as well as rival housebuilders aren’t persuaded. The CEO of one specialist tells me: “Their tactics are very disappointing. I’m certain when the market recovers and there is a shortage of resource, they will have lost any loyalty from the better subcontractors.”
Natural limit
There’s probably a natural limit to building costs going down too far. I’m hearing that two or three of the biggest housebuilders are contemplating opening up more sites from their existing landbanks, even though they’ve signalled little appetite to add to them. The rationale is that they do not expect private sales rates to move up much above the current rate of about 0.5 per outlet per week, so they need more sites to sell from to generate growth.
I’ve heard that a 20% increase in locations has been mooted over the next couple of years or so by at least one top-five housebuilder. If so, there could be more pressure on ‘front-end’ trades, such as ground engineering and foundations. Bricks and blocks are likely to be next in line.
Brickmakers have a much stronger hand than when they were facing the last major downturn, after the global financial crisis: the industry, of which there are three dominant players, had annual capacity of 2.6 billion bricks; now, it’s just above 2.2 billion from fewer plants, the least efficient of which can be temporarily mothballed.
But the biggest potential cost for housebuilders is a key member of the supply chain going bust on the job. The administration of Henry Construction Projects and a swathe of mid-sized specialists has severely dented development programmes and hit profits for six on affected projects.
In its latest results, Berkeley Group said: “The greater supply-chain risk is now that of contractor insolvency.” The London-focused regeneration specialist had resorted to paying some builders on a weekly basis to tide them over, or even to buy some of their materials in advance.
So, the good news is that building costs are generally going down. But, as the adage goes, developers should avoid the temptation of ‘spoiling the ship for a ha’porth of tar’.
Alastair Stewart is an equities analyst and consultant
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