Rising fuel prices due to Middle East conflict may cause a crisis in the construction market. Photo / 123rf
By Susan Edmunds of RNZ
Rising fuel prices because of war in the Middle East are likely to create a serious crisis for the construction market that has not yet been fully understood, one expert says.
John Tookey, a professor at AUT’s school of future environments, said it would be a “huge” problem.
“Construction is unique in that it requires huge amounts of energy to form construction materials – for example, things as simple as bricks, plasterboard, aluminium extrusions – as well as huge amounts to transport it.
“Oil production is down through damage to wells and so forth by 22% or more – that is production capacity that is out for two or three years or more. This is not going to go away soon. Construction costs are going to spike shortly, maybe as much as 25% or more and will stay that way or escalate further.
“This is going to hammer the construction market, housing, infrastructure everything. At the same time that interest rates are going to rise – where construction totally relies on borrowed money.”
He said it still seemed as though people were hoping to “imagine away” the implications of the disruption to oil.
“The construction industry is massively energy-intensive. You know, what people don’t understand and don’t get is how many products are affected. Plastics, all plastics. Aluminium. Some of the biggest producers of aluminium are in the Gulf.
“They use the surplus gas that’s tapped off from the oil fields to fire smelters to process bulk aluminium, for instance. That means that the actual material cost of aluminium is going to go through the roof. Same with steel.
“The physical requirement to rebuild so much oil infrastructure is going to require vast amounts of steel for piping, which means that the cost of structural steel is going to go through the roof.
“The cost of making bricks, how do you make bricks? You fire them in a kiln. How do you fire them in a kiln? Well, you either use electricity or you use gas, very often gas.”
He said it could be an “epoch-making moment”. “The building industry is going to get tanked … I’ve got friends in the industry who are getting hit systematically by price rises, price rises, price rises on everything. Anything that is energy-intensive is going bananas. And, you know, I could see a potentially as much as a between 30% and 50% rise in construction materials.”
Building Industry Federation chief executive Julian Leys said he was concerned, too.
“I sit on an industry panel advising government on the building supply chain and also talk regularly to my counterpart in Australia – Building Products Industry Council.
“We are seeing increases already announced for May in PVC and PE building products – there is a requirement that manufacturers or suppliers give three months’ notice for any price increases so May or June is when we can start to see the first of these coming through.”
He said he spoke to a member of the federation who was importing from China and being asked by a manufacturer to pay 22% more for the same product because of the conflict, due to higher shipping charges, increased port charges and freight and transport charges up 44%.
“He has asked one of his biggest customers in NZ if they can accept a 3% price increase to partially cover his costs above. That customer has said no and so he is faced with the prospect of every dollar he invests in this product only getting 90 cents back which is not sustainable.
“The other materials that have or will be impacted directly out of the Middle East are aluminium, bitumen for roading, and also chemicals used in timber treatment process although we have good stocks at the moment. Inevitably if the conflict is prolonged it is going to drive up the prices of building materials and impact the cost of building a house.”
Cotality chief property economist Kelvin Davidson said he was not as convinced that people building a new home, for example, would feel a huge impact.
“We’ve heard anecdotes already … some bricklayers had already had letters from suppliers saying costs to get you these materials are going to go up 10% to 15%. But that was due to fuel surcharges, so transport costs going up.
“But I think more broadly our index of house building costs is about half materials and half wages, let’s say, more or less.
“If you think about the end cost to the person looking to buy that new build or take on a new build project, I mean, yes, there’s going to be some inflation there for sure, because the materials will go up … it feels like there’ll be some inflation there.
“But then that’s only half of our index, pretty much, and it doesn’t necessarily feel like wages are going to skyrocket in this environment so far.”
He said unemployment was higher than post-Covid and the economy was weaker.
“You might see some materials cost inflation, but you may not necessarily see much wages inflation. So, you know, you might only get half the overall inflation that you otherwise might have got. So, you know, I don’t think it’s necessarily sort of panic stations in terms of the end cost to build a house.”
He said if building became too expensive compared to the currently subdued market for existing homes, it would slow building activity.
“It doesn’t feel like a set of conditions where the wider housing market itself is going to surge. So it just feels like the wider environment is going to be tough, I guess, for builders to pass through any price rises.”