Scaling new heights… Next six months to see spike in building material costs

While recent conversation has centred on house prices peaking, the construction costs for new homes are not expected to slow down any time soon. Following a higher than anticipated 16% increase in material costs over the last three months, building suppliers are estimating a further 12% increase in the cost of their materials over the next six months, according to the latest research from Eboss.

“The Eboss Q4 2021 Construction Supply Chain Update highlights that the building supply chain situation is still critical, with freight pressures hitting suppliers hard and price increases expected to continue over the next six months,” says the company.

The Q4 Update surveyed 219 suppliers across major product categories for residential and commercial construction on logistics, price impacts, the sustainability of New Zealand’s supply chain, operating in a global market and current lead times. The report also compares sentiment and forecasts from the previous quarter.

Conducted in November, the aim of the survey was to provide an update on the current and future state of the building product supply chain and help specifiers and builders to better plan ahead.

Key Findings:

• 82% of suppliers are having issues supplying the market, an increase on three months ago

• 83% of suppliers state freight as a key issue impacting their business’ ability to supply

• 98% of suppliers report the cost to buy materials from overseas has increased in the past six months (including both freight and supply cost increases)

• 16% is the average increase in the cost of building materials over the last three months

• Building products are forecast to increase a further 12% by April 2022

• Increased global demand for building products is affecting suppliers’ ability to service the market — impacting two-thirds of suppliers, up 5% on September 2021

• 87% of suppliers have increased the cost to customers over the last six months with only 13% reporting that they haven’t made any changes to the cost to customers. 83% expect further increases to the cost to consumers over the next 6 months

• 93% of suppliers don’t feel fully confident they’ll be able to pass on the full cost of increases they experience, with only 22% reporting they are able to pass on cost increases within three months (and 15% saying they don’t pass on the full cost increase)

The quarter results highlighted cost pressures within the supply chain.

“Suppliers are being hit hard with ongoing increases to product and freight costs, yet many are reluctant to pass on the costs to consumers. Close to 100% have reported that the cost to buy materials from overseas has increased, yet only two-thirds have passed those costs on.”

While suppliers predict that cost pressures will reduce in coming months, those predictions need to be taken with caution; prior predictions from suppliers have tended to be optimistic, with the number reporting significant cost increases for the Aug 21 – Jan 22 period having already doubled previous predictions.

“Needless to say, we can still see price increases coming for the foreseeable future,” says Matthew Duder, managing director, Eboss. “With such uncertainty on the future cost of materials, builders have an increasingly difficult job when it comes to pricing build contracts.”

Sentiment from many suppliers is that architects and builders are taking on an unsustainable amount of work. The number of dwelling consents in New Zealand is at an all-time high, with BRANZ forecasting new residential building consents to stay at record levels of over 40,000 for the next four years, but the problems around supply and material costs mean the industry may not meet this growing demand.

Freight issues including increased shipping costs, worldwide shipping issues and delays at NZ ports are continuing to impact suppliers’ abilities to reliably supply to the market.

“The number of suppliers experiencing freight issues is still in the majority,” says Duder. “Due to the reduction in direct lines out of China and Europe to New Zealand, there’s an increased reliance on Australian ports to get products into New Zealand, so we’re heavily reliant on the effectiveness of Sydney, Brisbane and Melbourne ports.”

The report identifies the main ports the New Zealand building industry relies upon and measures lead times for different building product categories. In particular, products from structure and enclosure categories have long lead times of 10 weeks and 11 weeks on average respectively, with a significant number of suppliers from these categories requiring at least 24 weeks notice for product ordering.

Some 90% of suppliers are selling imported products or products containing imported components not easily replaced by domestic supply, meaning substitutions for NZ-manufactured products are unlikely to significantly ease the situation.

“The sentiment from two-thirds of suppliers is that they’ve got very little ability to impact lead times,” says Duder. “They’re trying to do the best they can, but often they’re dealing with forces far greater than they can influence.”