Rising costs may push house prices up 10-15%

While the cost of building materials continues to rise and developers and contractors continue to lament the cost of doing business, consumers may not be spared as it translates to higher prices of properties. Construction projects may also be stalled as building contractors and sub-contractors fail to absorb the rising cost.

According to quantity surveying firm Davis Langdon & Seah (M) Sdn Bhd's director Loo Ming Chee, house prices could go up between 10% and 15% this year in tandem with the overall escalation of construction contract sums estimated to be 16% to 18%.

"The average Joe will find home ownership increasingly difficult because disposable income or salaries are not moving up as fast," says Loo.

Master Builders Association Malaysia (MBAM) president Patrick Wong concurs with Loo. While the latest increases may not affect projects now under construction as they would have factored in the old prices of the building materials, he advises prospective homebuyers and investors to purchase the properties they have set their sights on now.

"Mortgage rates of between 5% and 7% are quite cheap now but with inflation taking place, borrowing costs will go up," says Wong.

Increases in the costs of building materials are in tandem with rising global demand and costs of raw materials but Wong says firms that are not able to absorb these increases would be forced to close.

"We have about 600 members and there are more than 50,000 contractors in the country. In the last five years, about 20% of our members have closed shop because they can't sustain the costs of building materials. Those who could sustain are experiencing tighter profit margins," says Wong.

"In the worst-case scenario, projects can be affected if the developer is not able to find another contractor should the initial contractor bail out due to its inability to absorb the costs hike," adds Wong, noting that this would lead to projects being abandoned.

Building materials cost

Steel: The government increased the ceiling price of steel bars and billets three times last year, by more than 40%. Billet prices today range from RM1,907 to RM2,035 per tonne, prices for steel bars range between RM2,000 and RM2,400 per tonne. Steel and cement are price and import-controlled items which fall under the purview of the Domestic Trade and Consumer Affairs Ministry.

Cement: According to MBAM, contractors usually buy their cement at retail prices from hardware stores. Since December 2006 onwards, the ceiling price for cement retails at RM10.95 per 50kg bag. However, contractors usually pay between RM15 and RM20 per bag after loading charges. Between 1996 and 2006, the ceiling price for cement was RM9.90 per 50kg bag.

Copper: This is used mainly in the mechanical and engineering aspects of a building, such as the air-conditioning and wiring. Importers are subjected to fluctuating prices on the London Metal Exchange, touted as the world's premier non-ferrous metals market. Latest prices are being traded at US$8,450 (about RM27,000) per tonne against the average price of US$8,115.75 last month. "In the last six months. prices have escalated between 40% and 50%," says Electrical and Electronics Association of Malaysia's spokesman Chew Shee Fuee.

Stone: While the prices of stones and aggregate pebbles vary from state to state, the Malaysian Quarry Association says prices of aggregates and metal, excluding the cost of transportation, in Selangor and Kuala Lumpur range from RM18 to RM19 per tonne currently. A year ago, it was selling at between RM15 and RM16 per tonne.

Reuters reported last month that global steel prices could hit new peaks this year due to the rising raw material, energy and freight costs coupled with tighter supplies and decreasing exports from China. UBS analyst Andrew Snowdowne had said exports from China have been weaker which has resulted in inventories in Europe to fall, resulting in more price pressure.

China has also raised its export tax for steel billets to 25% effective Jan 1 this year, and while this has slashed supplies to Europe, it has caused prices to escalate. Meanwhile, the world largest steelmaker ArcelorMittal had said it would be increasing flat carbon steel prices in Europe by 12% to 15% starting next month.

JP Morgan analyst Jeff Largey, in the same Reuters report, said steel prices would remain high due to rising costs of underlying raw materials.

Meanwhile, oil prices hit US$103 per barrel last week. With the fuel price increases, Davis Langdon & Seah's Loo says that the knock-on effect on the construction sector will be very apparent.

"The construction industry uses a lot of diesel, be it for transportation or production.

"Based on our Building Works Composite Tender Price Index, we had to index and re-price the tenders received for 2007 and it went from an index number of 123 to 137, indicating a cost escalation of approximately 11.75% over a 12-month period," says Loo.

Davis Langdon & Seah processes about 100 to 120 tenders per annum and with the data, it has formulated the Building Works Composite Tender Price Index which uses year 2000 as a base.

"Depending on the location and size of the property, the rule of thumb for construction costs in a landed home is usually between 40% and 50% of the selling price. Land and labour costs have not been factored in," says MBAM's Wong.

For example, the costs of construction of a double-storey terraced home selling for RM400,000 today could easily range between RM150,000 and RM200,000, says MBAM's Wong.

However, for developers with premium projects in good locations, Wong feels it is easier to pass on the costs as the prospective buyers of such projects are willing to pay.

"For instance, developers of projects in the vicinity of the Kuala Lumpur city centre can easily price their projects after doubling their costs and still be able to sell their products. On the other hand, the same cannot be applied to a developer with a project in Rawang," says Wong.

According to MBAM, the prices of building materials, particularly steel bars, have been stable and were ranging between RM1,500 and RM1,800 per tonne up until 2006. The local economy, says Wong, underwent a slump between 2003 and 2005 and the GDP registered negative growth.

"At that time, there were not many construction jobs so prices of building materials were stable," adds Wong.

The announcement of the 2008 Olympics in China in late 2005 caused an escalated demand for steel. "With China needing tens of millions of tonnes of iron ore and scrap metal for their mega projects, the costs of raw materials went up," says Wong, adding that prices of aluminium, plywood, timber and electrical wire cables also went up.

The Middle East also experienced a real estate boom, while Singapore announced the development of two integrated resorts on the island. - By The Edge Daily

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