[Take note of the skills shortage in the construction industry. Where did all the skills go? A co-worker recently had a townhouse build in a new complex. He was telling us about walls which were SKEW… and how two townhouses, built to exactly the same plans are actually different!! That is how bad the skill levels are now… we can’t even build a decent building any more. Jan]

Johannesburg – The inflation rate of building materials for December was reported at 5% year-on-year, now slightly lower than the overall producer price inflation rate of 5.1%. This is significantly down from a peak of 9.2% reached in February 2005.

However, the Bureau of Economic Research (BER) suggests that building cost inflation was running at around 20% in the fourth quarter of 2005. Also, building materials currently experience high inflation that is well above the overall index since 2000.

This means that in real life material costs are a bigger portion of building than the index weightings now suggest.

Nevertheless, all of these inflation rates remain well-below the BER Building cost index, suggesting that the worst cost inflation is driven by the high degree of pricing power of the building contractors and their labour, which is reportedly in short supply.

The BER reported at the end of 2005 that 95% of building contractors now report a lack of suitably skilled labour.

This indicates two things. Firstly, that much of the overall building cost inflationary pressure comes from a skilled labour shortage, while strength of demand for contractors’ services has also raised the pricing power of building contractors in recent years.

Secondly, while the overall inflation rate for building materials does not appear problematic, the BER states that 87% (up from just above 40% in 2002) of building contractors reporting inadequate supply of building material.

This supply squeeze may be restricted to only a few material types such as bricks and cement in certain areas, but it does not matter. Bottlenecks in supply of these basic materials can obviously delay the whole building process.

The current supply squeeze in skills as well as certain materials, therefore, could be putting the brakes on property development in the coming years.

The issue of late completions and resultant penalties, or alternatively tenants walking away from a project not completed on time, could also create problems in the future.

While skills and supply shortages are problematic in the short term, markets are dynamic, and the resultant strong upward pressure on wages and prices of certain materials should lead to a more rapid growth production capacity and supply of suitable skilled labour in the industry. However, this can take a few years.

In the mean time, don’t be fooled by the low price inflation in overall building materials indices. The situation would still appear to be constraining on the pace of growth in property development.

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URL: http://www.fin24.co.za/articles/default/displ…/p>