Impact of inflation on the construction industry

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Introduction

The rate of inflation in the UK has risen dramatically in 2022. For many years, the rate has been relatively low and stable. However, rates have soared in the last twelve months. The inflation rate hit 10.1% in July 2022 (source). This is the highest rate on record since 1982. Rising inflation impacts businesses, consumers and organisations. In this guide, we’ll analyse the effect on construction companies, housebuilders, homeowners and buyers searching for new homes

What is the impact of high inflation rates on the construction industry?

Rising inflation rates come on the back of a global pandemic and conflict in Ukraine, which have caused significant disruption to supply chains and pushed costs up for construction businesses and housebuilders. At a time when it was increasingly difficult to secure materials and equipment and hire workforces, the rate of inflation started to creep up. Just as the demand for housing was surging, construction firms began to feel the bite of rising costs. 

There are two main issues to consider when analysing the impact of the rise in inflation on the construction sector. These include labour and the cost of materials. 

  • Labour

Labour costs have increased in line with the rising demand for skilled, experienced workers. In April 2022, there were 48,000 job vacancies within the industry, which is a record. Shortages of skilled workers and wage inflation contributed to significant increases in costs for construction companies and businesses looking to hire construction workers. Figures show an 8% wage increase between Q4 in 2020 and 2021 (source). 

  • Materials

The cost of materials has spiralled in the last year due to the situation in Ukraine and rising inflation rates. According to the Building Cost Information Service Materials Cost Index, prices will treble during the course of 2022. Price increases have been especially dramatic for materials, including timber, steel, bricks and basic metals. The cost of materials for the average 3-bedroom house is expected to increase by 15% by the end of 2022 compared to January 2021. 

What do rising costs mean for construction companies and customers?

Rising costs have consequences for construction companies and customers looking to buy or upgrade a property. For developers, rising house prices have made it possible to turn over profits but the market is expected to slow, which will squeeze margins. For customers, it is now much more expensive to build and renovate properties. The cost of buying a house has also increased due to rising construction costs, higher mortgage payments, shortages of skilled construction workers and a substantial increase in house prices. 

Conclusion

The rising rate of inflation is one of the most dominant talking points in the news at the moment. High rates of inflation have contributed to soaring costs within the construction industry, most notably in labour and materials. Higher costs for housebuilders push prices up for consumers and buyers looking for a new home.