Focus: Construction material prices

Mi casa es…

Mar. 13, 2020

A shortage of labor and land have lead to double-digit increases in construction costs in Spain, causing headaches for buyers and builders alike.

Spanish construction companies and developers are running up against soaring and volatile costs for building new buildings, due to factors both native to Spain and political disorganization across the EU.

The bad news is that the problem shows no signs of letting up, but the good news is that the solution is available, if Brussels and Madrid want it. Experts say a shortage of land and labor is driving up the prices of new Spanish housing, along with a modest uptick in material costs. Fixing the problem may require changes in immigration policy and zoning laws.
Spanish construction and real estate development have had a difficult decade. Prices plummeted after the global financial crisis in 2008, and then failed to rebound until 2014. Now, prices and demand are rising, but so are the costs of construction, meaning smaller margins for the companies that build Spanish housing.
Overall, construction costs went up 10% in 2018, according to ACR Grupo, and the trend is likely to continue.
“A year and a half ago I asked a small construction company for a project in Leganés, I drafted the project, I got the license from the town hall, and when I spoke with the construction company to start the project, I was asked for 35% more than initially agreed. Madness," a developer told the Spanish newspaper El Confidencial in 2018.
There is also evidence to suggest that the pain is upon consumers, especially young renters and would-be home buyers, who have muddled through their lives trying to dodge high unemployment. The mayor of Madrid announced recently a monthly subsidy for young people of EUR150 that will help cover the cost of housing. Such measures might as well be a dialysis machine for a vital organ of the Spanish economy that cannot work properly on its own.
The volatility of building material costs has led some developers to focus more on securing stable prices farther upstream in the supply chain.
“There is a major problem with the cost of materials," Antonio Martín Jiménez, President of Grupo Avintia, told TBY in an interview. “We are trying to tackle the issue with a new project called Proyecta, where we work upstream with the client in the industrialization and development parts. We help the client or the developer to meet their expectations of term, price, and quality. For terms, we work with construction systems and take the project forward."
Analysts say that a perfect storm of factors contributed to the increase in construction costs, with demographics playing a major role.
Elisa Castillo Nieto, a reporter with Spanish business publication CincoDias who has been covering the housing market, said developers are asking for the government to reclassify neglected industrial land as residential areas. This sounds easy enough, but the more difficult problem for Madrid to solve concerns demographics.
“The increase in labor costs may be due to the great lack of labor force, which practically disappeared after the bursting of the housing bubble in Spain," she added. “For almost a decade, and with the real estate sector totally stagnated, young people did not see this sector as an attractive area to work in since it did not offer any job opportunities. This has meant that today the average construction worker is over 50 years old."
It seems unlikely that native born Spanish youth will be able to pick up the building trade fast enough to provide relief for housing prices.
The solution to a lack of labor is quite literally on Spain's doorstep. Migrants fleeing poverty and war in Africa and the Middle East are desperate to get to Spain, with ports in other countries turning back vessels in the Mediterranean carrying them. There is evidence Spain is starting to follow this trend, as deterring immigration has animated right-wing politics. The maritime regulator is even threatening million-dollar fines for individuals attempting to rescue stricken migrant boats at sea. This is happening in the absence of coherent EU-wide policy on migration.
In the long term, Spain's slumping birth rate and labor shortage are problems that will drag on economic growth and bedevil business for decades to come. By devising a path to citizenship in Spain for newcomers, Madrid and Brussels, working together, can arrest this troubling trend at its beginning.