Rising house prices mean rising construction costs – are you prepared?

It would seem that the British property market has well and truly recovered from the economic crisis, with scores of people turning to property for a secure, long-term investment.

In the three months to June, house prices were 9.6% higher than the same period a year ago, according to the Halifax index, and the LSL index is reporting an average annual rent increase of 1.8%, making property investment more attractive than ever. The proof is in the financial market - since April, the amount of buy-to-let mortgage products available for first-time landlords has risen by 13%.

However, with a buoyant housing market also comes rising construction costs. So while bargains can still be snatched up and returns increased by buying run down properties and refurbishing them to a high standard, the cost of such work has increased. As confidence returns to the property market, more builders and construction firms have seen a surge of activity and are taking the opportunity to start making a profit again.

The (Cost Update (Q1 2015) from Building.co.uk reported an increase in the cost of construction across all measured sectors of the construction industry. This means that carrying out building and refurbishment work is only getting more expensive, even though inflation dropped below zero in April.

Building Cost Index

The Building Cost Index tracks movement in the input costs of construction work and is the most significant measurement for buy-to-let investors or developers budgeting for a build or refurbishment project. This incorporates the main costs of building work, including national wage agreements and changes in materials prices, which themselves are measured by various government index series. In the year to Q1 2015, the Building Cost Index increased by 1.9%, compared to a 0.2% increase in the year to Q1 2014.

What has risen and fallen in price most significantly in the construction sector?

The Price Adjustment Formulae indices, which are compiled by the Building Cost Information Service, show the changes in cost of various components of construction work. For example, in Q1 2015, the greatest rises in costs were seen for aluminium doors and windows, which became 5.4% more expensive, whereas metal decking saw the greatest drop in price, of around -9.1%.

These price indices, which any good contractor should base their quotes on, could affect the price you pay. If you are undertaking a particularly large project, it is a good idea to refer to the indices before you make any purchasing decisions.

Despite the overall 1.9% rise in the Building Cost Index in the year to Q1 2015, construction prices for repairs and maintenance specifically have dropped by 1.3% year on year - a small decrease, but one that can make all the difference when you're running a large portfolio!

Labour

Labour is a key cost to consider, and many labourers work as sub-contractors, rather than being formally employed by a building company. This means that, to a certain extent, they can adjust the cost of their labour according to the local market conditions. If there is plenty of work around, they will put their prices up, but if there is a shortage, they may lower their prices in order secure the work.

Materials

Many of the materials required for a construction project see regular fluctuations in price according to supply and demand. Most builders however should be able to obtain material discounts, especially if buying in bulk, or if they have a good relationship with suppliers. Making sure you're getting a good deal could save you hundreds, if not thousands, of pounds.

Profit

It was the case for a long time after the recession that many contractors would work for little or no profit. However, with the demand for construction and building work now on the increase, most will expect to make a certain margin of profit and negotiating will be more difficult.

Overheads

Like most businesses, contractors have their overheads, even if it doesn't appear so. Insurance, advertising, sales commission, job supervision, office expenses, accounting, legal fees, taxes and expenses are just a few! All these expenses are subject to their own price fluctuations, and can have a knock on effect on the mark-up they charge on quotes.

*** So the lesson to be learnt is this - a rising market has its pros and cons and understanding the costs associated with buying and refurbishing a property, as a buy-to-let investment or a home to live in, is key.

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