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Construction material cost pushes up property price?

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Construction material cost pushes up property price?

There was this article which appeared a few times in my FB page and also in some Whatsapp groups. Article in nst.com.my Title: Property prices will rise next year as construction materials become more expensive. Knight Frank Malaysia deputy managing director Keith Ooi said, “Any increase in material or construction costs will eventually affect the selling price. The developer will pass on the cost to the respective consumers or buyers in some way.” The article is a long one. Do read the full article here yeah. Article in nst.com.my

Would construction material price become more expensive?

With the world economy coming back after a very slow first half of 2021 due to Covid-19, it will inevitably push up demand suddenly. Due to this, prices are pressured to move upwards because supply cannot suddenly increase. Just need to look at some advanced property markets for some clues yeah. Property developers did not or delayed their launches.

Suddenly, potential buyers are back to galleries and they are also starting to view properties again because their decision were delayed due to the lockdowns. Suddenly, all the property developers are ordering construction materials. This is why at least within a short period of time, construction material price will become more expensive.

What happens when the construction material price goes up?

Simple answer to this question. Property price would have to be adjusted upwards or the developer may choose to take a lower margin. It may be both as well. So, it does seem that property price may just be moving up especially for future launches if the developer chooses to absorb the current rise in material cost for existing project. However this applies only to the new developments right. The secondary property market is already completed, surely the construction material has nothing to do with the secondary property market price?

When price of new property moves up will this then mean everyone will buy a secondary property instead?

Secondary property market comprise around 80% of the total market transactions. The new properties only 20%. Assuming the gap was 20% between the secondary and the new property market, this gap may widen when new properties are priced higher. Now, when the new properties are priced higher… the people may be tempted to buy a secondary property instead.

This means demand for secondary market properties move up (especially in similar area and similar type) and usually this meant that prices of these secondary property will also move upwards. Thus, the price gap between the secondary property and the new property narrowed again but it’s because both the new property price as well as the secondary property price has since adjusted upwards in-tandem.

Conclusion

Material construction cost going up does not mean property prices immediately move upwards. It is more likely that the current construction materials have been purchased earlier. However, in the near future, with a higher cost, it does mean that the property developer will need to adjust their prices. We just need to remember that they would not want to lose customers in a slow market, thus any adjustment will take this into account.

This is also why property prices do move upwards due to reasons beyond just premium location, new catalysts and even other emotional reasons.

Happy understanding.

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Charles Tan The Founder The Writer Kopiandproperty
Charles Tan

Charles is Founder of kopiandproperty.com He writes from his investment experience for the the past 20 years in investments including property, stock, unit trust and more as well as readings and conversations with many property gurus in the industry. kopiandproperty.com is an independent property blog which is not affiliated to any media company, property developer or even real estate agencies.

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