In the realm of real estate, property prices are subject to a multitude of factors that influence their value. From location and market demand to property size and amenities, the interplay of these variables creates a complex pricing landscape. One fundamental determinant that significantly affects the price of property is the cost of construction. Rising construction costs is nothing new to the Philppine real estate market, however, the inflation experienced by the country in the past months has taken its toll to the materials and house construction costs.
In an article published by the Business World, the soaring inflation caused the Construction Materials Wholesale Price Index (CMWPI) in the National Capital Region to soar high at 8.3%– the highest ever recorded in 14 years. In addition, according to the the International Construction Costs Index 2023 reveals that building a house in Metro Manila has a higher cost per square meter than our neighboring countries like Vietnam, Malaysia, and India.
This means that building a house in Metro Manila has a higher cost per square meter than our neighboring countries like Vietnam, Malaysia, and India.
Over the years, construction costs have experienced significant fluctuations driven by numerous external factors. For instance, shifts in global supply and demand for building materials, such as lumber, steel, or concrete, can directly impact construction expenses. Moreover, labor shortages, changes in government regulations, and advancements in construction technology also play pivotal roles in shaping the cost landscape.
As an OFW investor, you may be worried that the rising house construction cost may affect the price of the house in the Philippines you are eyeing for. Well, you may be right on that part. Let’s take a look at the effect of rising construction costs on real estate investments:
The construction and labor cost is passed down to consumers
Contractors are forced to put the weight of the rising basic construction costs to the shoulders of the consumers. This may lead to consumers backing away from the project or budget overruns on the part of the contractor.
In relation to the abovementioned, if the house construction budget goes overboard due to inflation, it may result in project delays or not pushing through at all. They may feel discouraged in investing due to the project delays.
Rising construction costs can make housing less affordable for potential buyers. As the price of constructing or renovating homes increases, developers and builders may need to adjust their pricing strategies to maintain profitability. This can lead to higher listing prices for new homes, making it more challenging for buyers to enter the housing market or afford the type of home they desire.
Limited Housing Supply
Higher construction costs may discourage developers from initiating new housing projects. When construction becomes more expensive, developers may delay or cancel new developments, resulting in a reduced housing supply. With fewer properties available for sale, competition among buyers increases, further driving up prices.
Increased Homeowner Expenses
Rising construction costs can also impact existing homeowners. Homeowners planning renovations or remodeling projects may face higher costs, deterring them from making improvements or leading to scaled-down projects. Additionally, maintenance and repair costs for existing homes may also increase, affecting homeowners’ budgets and potentially impacting property values.
Construction cost increases can have varying effects on house prices, with regional disparities being a key factor. Construction costs can vary significantly between different areas due to factors such as labor availability, material prices, and local regulations. Therefore, regions with higher construction costs may experience more pronounced effects on housing prices, potentially exacerbating regional housing affordability gaps.
Overall Market Slowdown
If rising construction costs significantly outpace homebuyers’ ability to afford higher prices, it can dampen demand in the housing market. This slowdown in demand can have broader economic implications, affecting related industries such as real estate, construction, and home improvement, potentially leading to job losses and decreased economic activity.
Can OFWs still Buy a House Amid Rising Construction Cost?
The answer is yes, however, you have to be prepared for the additional or high expenses that entails it. You also have to be flexible and patient as you wait for the curve to somehow flatten once again. Additionally, you may also consider other financing options that can aid you in your real estate purchase.
During periods of rising construction costs, there are several alternatives that can be considered to mitigate the impact on housing prices and address affordability concerns. Here are a few options:
Focus on Renovations and Remodeling
As you wait for the prices to go down, you may focus on renovating or remodeling existing properties. This option can be more cost-effective as it avoids the higher expenses associated with new construction. By updating and improving older homes, homeowners can still meet their housing needs while potentially saving money.
Explore Alternative Construction Methods
Alternative construction methods, such as modular or prefabricated construction, can help reduce costs and construction time. These methods involve the fabrication of building components off-site, allowing for more efficient and cost-effective construction. Embracing such techniques can help developers and builders save on labor and material costs.
Opt for Smaller-Scale Projects
Instead of large-scale developments, focusing on smaller-scale projects can be a viable alternative. Building smaller, more compact homes or developing multifamily housing options like townhouses or apartments can help optimize land usage and reduce overall construction costs. These options can provide more affordable housing choices while maximizing limited resources.
Evaluate the Risks
Understanding market cycles helps OFW investors evaluate and manage risk effectively. By being aware of the potential fluctuations in construction costs and market conditions, they can make informed decisions regarding project feasibility, financing, and risk management strategies. This knowledge allows for a more proactive and measured approach to mitigate the potential impacts of rising construction costs on the financial viability of projects.
The cost of construction encompasses an array of expenses, including materials, labor, permits, machinery, and design. Changes in these factors can have a profound impact on the final price tag attached to a property. Understanding the dynamics of construction costs and their relationship with property prices is crucial for developers, investors, and homebuyers alike, as it allows them to make informed decisions and navigate the ever-changing real estate market.