Building supply shortage fuels cost-of-living concerns

Nathan Law

A global shortage of building supplies is driving up the cost of construction, leading to delays in new developments and fuelling predictions of even higher house prices in the Cayman Islands. The cost of materials – including copper, lumber, PVC and concrete – has escalated across the globe because of […]

A global shortage of building supplies is driving up the cost of construction, leading to delays in new developments and fuelling predictions of even higher house prices in the Cayman Islands.

The cost of materials – including copper, lumber, PVC and concrete – has escalated across the globe because of depleted production during the worst of the pandemic in 2020 and surging demand from economies coming out of lockdown this year.

The same factors are the cause of rising food prices, reported in the Cayman Compass last week.

With the cost of oil rebounding after a slump during the pandemic, higher electricity bills and petrol prices could also be in the pipeline.

Dave Johnston, president of the Cayman Contractors Association, said the impact would eventually filter through to everyone in Cayman.

“The cost of living is going to increase. Food prices are up, fuel is up, housing is going to go up,” Johnston added.

Record-breaking price rises

Daniel Murphy, retail manager at A. L. Thompson’s, said there had been record-breaking price increases throughout COVID and beyond on raw materials.

At one point last year, lumber had gone up 300% on some products. That has since come down but the market in raw materials remains volatile.

“I can’t think of any vendor that has not been impacted significantly by the effects of the pandemic,” said Murphy.

“We have seen a drastic increase in terms of lead times, items being on back order for extended periods and then when the items are available, the price has gone up significantly across the board.”

The market for lumber has been particularly volatile. – Photo: Taneos Ramsay

The problem is compounded by the increased cost of shipping. The price to bring a 40-foot container from China – which produces more than half of the world’s steel – to Jamaica has gone up from US$2,500 a year ago to US$11,500 today, according to Richard Pandohie, president of the Jamaica Manufacturers and Exporters Association.

The pandemic had no impact on the number and frequency of cargo ships coming in to Cayman from Jamaica and Florida, says Cayman Port Authority Director Joey Woods.

But he warned the availability of containers and price of shipping from Asia have inevitably had an impact on the cost of goods coming into the island.

Delayed projects possible

The net effect of all those factors is increased costs for contractors and developers, along with delayed progress on a number of housing and hotel projects that were accelerated to boost Cayman’s economy in the aftermath of last year’s lockdown.

Matthew Wight, president of NCB, which is building the OLEA residential development at Camana Bay as well as a boutique Curio Collection by Hilton Hotel opposite Kirk Market in George Town, said price increases and lack of availability of materials would impact its ability to deliver projects on time.

NCB is particularly hard hit because it acts as both contractor and developer.

NCB is mid construction on a number of projects including a new hotel opposite Kirk Market. Photo: Taneos Ramsay

“Our contracts are based on a fixed price and when the cost of materials escalate, it’s a huge loss to us as we’re having to cover these price increases. This is a risk we take unfortunately, but it’s definitely hurting us,” said Wight.

On pre-sold homes there is no possibility for a developer to recoup costs by pushing up the price.

Higher home prices

But Wight said the situation would lead to higher property prices in the long term.

“The prices of homes in the future will absolutely increase as there is a direct correlation between the cost of materials and unit prices,” he said.

Neil Purton, director at BCQS International, said anyone building property will be immediately impacted.

“Homeowners that are looking to start construction now will be paying a premium as the shortage of raw materials is pushing up construction costs in the short term,” Purton said.

He believes contractors that bid on fixed price building projects will also be hurting because of the “massive escalation” in material prices and delivery times.

Rick Riyat, a valuation surveyor at the firm, said it was inevitable that some of these costs would be passed on to the public. While buyers who bought homes in new developments prior to construction are protected against spikes in pricing, he said the impact would be felt by anyone looking to purchase homes or condos right now.

“Higher costs and declining availability for building materials and even appliances will drive up the price of new homes,” he said.

“Developers will be looking to maintain profit margins and this will inevitably push up list prices.”

Construction firms are already feeling the pinch.

Johnston said some firms had bid on projects a year ago, judging their price for the job on costs of raw materials that had since increased by as much as 70%.

He said the cost of everything needed for a building job, from rebar and PVC to steel, wood and drywall, has gone up significantly.

Contractors that don’t have ‘escalation clauses’ in their contracts with the developer could be facing the prospect of working for free or even making a loss on jobs, he warned.

The association is advising members to talk to developers and to seek compromise where possible. He said it would be in the long-term best interests of developers and financiers of projects to share the pain.

“There is going to have to be compromise. If a contractor is going to do a job for a year and lose $100,000, some will inevitably ask, what is the point?”

Labour challenges

The cost escalation is compounded by a lack of supply and greater cost of labour.

Contractors risk losing money on fixed price projects. Photo: Taneos Ramsay

Wages have gone up in the industry as businesses compete for talent while the cost of bringing in skilled tradespeople has become more difficult and more expensive amid global restrictions on travel.

Factoring in the cost of a potential 14-day quarantine, COVID tests, higher air fares and reduced availability of flights, Johnston said businesses were facing an additional bill of $3,000-$5,000 to bring in workers.

He said Caymanian employment across the industry was effectively “maxed out” and businesses that needed skilled workers had no choice but to bear the additional expense of bringing in qualified people from overseas.

Beyond the pandemic

It is not only the pandemic that is causing cost increases.

Flash freezes in Texas contributed to a worldwide shortage of PVC resin, which is used not only in pipe, but also in many other products such as windows, doors, and other composites, according to Murphy of A. L. Thompson’s.

A global shortage of microchips, used in everything from kettles and washing machines to generators and refrigerators, also means shortages and cost increases on household appliances, he added.

Murphy said A. L. Thompson’s had been strategic about how it had managed prices to keep the impact on consumers to a minimum. In some cases, he said increases were simply unavoidable.

“Our first cost on some of these goods is now higher than our ‘Pre-COVID’ retail price,” he added.

He believes prices are starting to settle and will decrease when the global supply chain kicks into gear once more.

“It is incredible the impact that COVID-19 has had in terms of commerce. We hope to see prices come down in the near future and are seeing signs of that, but we are at the mercy of the market. There is not much any of us can do.”

 

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