Home » Rising material costs add to home-building woes

Rising material costs add to home-building woes

Fast-rising material costs are a new problem facing the Spanish home-building industry, already under threat from the government. Soon it will be a mug’s game to build new homes in Spain, which will only make housing even more unaffordable.

The Spanish home building industry is still just a shadow of what it was before the real estate crash that started in 2007, but at least it has recovered some life since 2013, creating jobs, investment and homes for people to live in. Now even this feeble recovery is under threat from government policy, and fast-rising building costs.

Nobody in their right mind would like to see the industry return to where it was in the boom years, when Spain was starting more new homes than France, Italy and Germany combined. The home-building frenzy and housing bubble that inflated between 1996 and 2006 was an unmitigated disaster for Spain that massively distorted the economy, disfigured the coast with ugly development, and left a monstrous hangover in its wake the country is still dealing with today. 

spanish housing starts

One legacy of the boom is a glut of around half a million homes that were built but never sold. Many of those homes are crap in the wrong place and will never sell, existing mainly as toxic waste on the balance sheet of the Sareb, a.k.a Spain’s ‘bad bank’. Despite the glut Spain needs more new homes of the right quality in the right place to meet today’s demand, and keep housing affordable.

How many new homes should Spain build each year?

As you can see from the chart above, Spain started around 200,000 new homes annually before the boom kicked off, rising to above 600,000 in the boom years between 2004 and 2006. Housing starts crashed to below 30,000 in 2013, then slowly recovered to 96,000 in 2019, before Covid pushed starts back down to 75,000 in 2020. The chart looks like a rollercoaster ride.

In percentage terms, housing starts declined by 96% between 2006 and 2013, which all but wiped out the home building industry. The recovery since then has been feeble, as you can see from the chart, and Spain is a long way from building the amount of new homes it needs each year, estimated as 140,000 per year by IESE professor José Luis Suárez – an expert on the Spanish economy. Without enough new homes of the right quality in the right place, prices must rise, or demand must go unsatisfied. Either way, housing will remain inaccessible to many.

Rising building material costs

A new problem facing the industry is the fast-rising cost of building materials, which have increased by 22% this year, and forced 25% of construction companies to halt or delay building projects, according to a new report by the National Confederation of Construction (CNC), a trade body, based on a survey of 300 construction companies.

All 300 construction companies surveyed reported an increase in construction costs this year, even those who managed to avoid financial penalties of between1,500 and 3,000 euros per day for delays.

Building material costs are rising because of diminished supplies from China, and global supply chain bottlenecks resulting from the pandemic, we are told. 

Builders are reporting shortages of lumber, steel and aluminium, affecting the supply of cement, sanitaryware, glass, paint, floorings, household appliances, windows, lifts and pools, amongst other construction goods.

I get a weekly economics email from John Maudlin who discusses the inflation spike in the US and consumer goods shortgages resulting from bottlenecks in ports and trucking. He points out that “building materials are bulky and consume a lot of shipping capacity relative to their value,” so it’s not surprising that Spanish builders are feeling the pinch from problems in the global supply chain.

Builders report delays of up to 90 days in the delivery of building equipment, and 70 days in white goods. As a result, more than 50% of builders report delays in works, although slightly more than half managed to avoid delays to completion.

Higher construction costs mean higher sales prices or lower margins, both of which increase the business risk. Fewer projects will meet the investment hurdle rate, which means fewer homes built.

Hostile government

The Spanish home building industry is also under threat from its own government, which seems to see the industry as an obstacle to the supply of affordable homes. Rather than incentivise the industry to build more affordable homes, the government has recently announced plans to penalise the industry by forcing a social-housing quota of 30% on all new developments. This alone would make home-building a loss-making enterprise in Spain, at least in many cases.

That said, the details of the new housing law are yet to be published, and the governing left-wing coalition is sending mixed messages. The hard-left Podemos party say the 30% social housing quota will apply to all new developments, whilst the Socialists say there will be all manner of exceptions to soften the blow. Even so, the building industry has reacted with dismay, and investors will have taken note. Why take the risk when you can invest elsewhere?

A social-housing quota of 30% on all new residential projects above 600m2 has already been tried in Barcelona, where it has led to a collapse in new housing starts. As José Ramón Zurdo, boss of the Rental Negotiation Agency and a real estate lawyer recently wrote, social housing quotas in Barcelona have “caused private home building to almost disappear.” Much the same would happen at a national level if the government in Madrid goes ahead with a similar plan.

At least they are still building Gaudi’s Sagrada Familia cathedral in Barcelona, almost 100 years after his death.

Home building is a particularly risky business in Spain. Planning and taxes add 25% or more to the cost of new homes (more risk), the planning system is dysfunctional (though it varies by region), and the political risk is obviously high. With building material costs rising fast, and the government unnerving investors with talk of a new housing law that will penalise developers and undermine private property rights, a lot of potential investment will go elsewhere. Does the Spanish government have the resources and wherewithal to make up the difference? No chance.

So, what? Fewer homes will be built, and housing costs and/or scarcity will rise. This might increase the equity of those who already own, but it will also make the housing crisis worse, harm the economy, and make voters irritable.

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