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Why Are Homes Becoming More Expensive to Build?

Peter Hemple looks at the cost of building a home in 2015

We live in a deflationary world, or so we are told. Everything is getting cheaper thanks to production cost savings through automation and falling commodity prices, including what can now be considered cheap oil, which according to those in the industry will be 'lower for longer'.

But while the cost of buying many items may be falling, the cost of building a new home is certainly not. Matthew Pointon, property economist at Capital Economics, says: "Official statistics show that the real cost of constructing a home has essentially doubled over the past 10 years. That could indicate that homes are now much better quality than in the past, but it could also be a sign of inefficiencies in the homebuilding sector. Regardless, if costs had remained constant in real terms, all else equal, housing starts today would be back above their pre-crisis high."

However, Pointon says that even though the volume of new housing construction last year (£27.1bn) was at a similar level compared to 2007, the number of housing starts was almost 30% lower - 158,570 compared to 220,670 in 2007. This would imply that the construction cost per home increased by around 40% during that seven year period.

Costs have risen sharply in the past 12-18 months
Development costs across the construction sector have been climbing rapidly of late. The net balance (almost 70%) of respondents in RICS' latest construction survey, said that costs have been rising sharply over the last 12 to 18 months. The last time this figure hit 70% was in Q2 2008 and shortly after that the cost of construction crashed as countless schemes were delayed due to financing issues, forcing tradesman to drastically lower their prices as they fought over the smaller number of developments that had not been shelved.

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