Raw Material Shortage Adding to Housing Affordability Crisis
One of the unseen elements of the housing affordability crisis is the extra cost of building your home. But a solution exists … and it is a local one.
Housing affordability is something that’s on everyone’s radar at the moment. While buyers are very nervous about it, builders have their own anxieties, due to the increase in the costs of their materials, for which they’re liable to get stung by rising prices. Prospective owners now have an additional issue to consider in an already often-prohibitively expensive, difficult-to-get-into housing market.
We’re currently experiencing price rises in steel, lumber, and aluminium: all but the literal cornerstones of housing construction. Lumber went up by 20-25% this year. Builders in Queensland, Australia, are expecting a further 33% price rise, an accumulation that takes a toll over time. Builders in the United States recently experienced a 50% lumber price hike in a single month.
Iron ore prices have soared this year, hand-in-hand with the rising prices of aluminium. The reasons behind this will vary depending on who you ask. Minerals and resources companies are doing as they will – making hay while the sun shines. Supply and demand is another key factor – the past year has seen a boom in home builds and renovations, given the circumstances of closed borders and lockdowns. Resources (finite ones at that) are highly sought after in growing economies around the world. Price hikes are going to be a basic expectation under such circumstances. Add to the mix the rising cost of freight, and the numbers add up, and quickly.
There are two ways that builders price their projects: one, as a cost-plus contract; or two, a fixed contract price. A builder will put in a fixed-price contract for a job, and say the project will take eight to 12 months. That builder cannot predict the materials’ cost over such a long period of time any more than they can predict the weather. Uncertainty also applies to labor costs. A quote today for materials or labor is not guaranteed to be honored by the supplier in 30 days, much less 120 days. A quote for a roof for $40,000 could easily escalate to $60,000 within months, doing all kinds of damage to a project’s bottom line – all because the cost of the raw materials skyrocketed. It’s hard to build the kind of margins into a project budget for a custom builder if those kinds of blowouts are being incurred.
Margins can be eroded very quickly for smaller builders. Larger builders have recently been handing back dozens of contracts – and incurring the financial penalties for doing so.
The Impact on Builders and Buyers
Builders are negotiating with clients, saying, “We’ve given you this price for the build, but these other prices are beyond our control,” ending up with droves of builders if not the whole industry experiencing a “profitless boom.”
Fixed price contracts have also been bolstered by the federal government’s HomeBuilder Grant scheme. This combination may bring about builders going broke, and lenders being less inclined to lend for builds and renovations. Buying land to build on leaves you highly exposed in terms of your leveragability. It’s a situation that’s potentially very scary for people on both sides of the industry – homeowners and builders alike.
Solutions (Sustainable and Local Materials)
If you’re currently in this kind of situation – signed up to a building contract and everything that goes with it – the best advice I can give is to work with your builder every step of the way to ensure the builder won’t go broke. That happens and you’ll find yourself the proud owner of an unfinished house. Ask your builder where they are, find out what the landscape looks like moving forward, and what your part in it is going to be.
For those of us in the design industry, we’re approaching our engineers and finding significant problems getting specifically engineered products – partly due to demand and partly due to a lack of local or imported materials. We’d ask that the job be priced as though the materials were made from steel and timber. This obviously takes place at the engineering phase of the process, which costs more and puts the client a bit more out of pocket, but at least when going through the quoting phase, we can have alternatives available.
Colleagues I have spoken to in locations as far afield as the USA, UK, NZ, South Africa, Spain, Germany, and Australia alike all said they were all experiencing the same problems in their marketplaces.
The general consensus as far as solutions are concerned is threefold: initially, homeowners need to lock in their builder early, and design to cost. This way, each of the three stakeholders (the designer, the client, and the builder) are all on the same page and mission to achieve the client’s dream. Secondly, lock in the builder’s profit as a dollar amount not a percentage of their fees. Once the project is quoted, the fee is locked in and not subject to inflation. Finally, if cash flow allows for it, pre-buy materials where they are available. This will save you money in the long run as they are often most at risk of big price hikes.
Plan for Financial Wiggle Room
It’s important to have options. Know what aspects of the build can be locked in at a fixed price, and do that. Know what cannot have fixed prices, and work room into the budget to allow for the likely fluctuations recently seen. Negotiate what price hikes can be shared between the builder and the client that can allow the project to withstand cost blowouts of varying degrees and allow the project to continue. Can you lock in your framing costs or your concrete costs?
People still want to renovate and/or build new; a de-urbanization trend has taken hold in many parts of the country and around the world. People have been waiting for sheets of cladding for months on end due to material shortages. We’re advising clients to design smaller with less need for the more complex builds.
“Overbuilding” is a uniquely Australian thing to do. We have the second biggest houses in the world. Let’s not overbuild, or just build for the sake of space.
Overbuilding brings with it a substantial risk: prices racing back to “normal” is unlikely, so the industry generally expects higher rates for the next 12-18 months.
This scenario has shifted the building industry towards expanding their horizons in terms of what materials they can use, and what materials can be designed with. We could see a reduction in the size of our ecological footprints; making better use of outdoor areas to maximize the potential for natural heating and cooling.
Think of eco-friendly alternatives where possible; they have an opportunity to come into their own at a time like this, providing a win-win for the industry and homeowners, in addition to their being more ecologically sustainable and available.
Adrian Ramsay is an award-winning designer from Buderim on Queensland’s Sunshine Coast. His work can be found at https://www.ardesignhouse.com/