A Series That Is Well-Known for Its Volatility Is Construction Costs

Usually the articles I write feature change of some sort. Most often it’s a statistical series that has moved up or down. Sideways is the exception. A series that is well-known for its volatility is construction costs. That’s why it’s a bit of a shock to be reporting that for March 2012, the major construction cost index indicators are mainly flat. The material that follows will mostly pertain to construction material costs. The same general pattern, however, appears with respect to on-site labour. Statistics Canada has reported that the construction union wage rate index(including supplements) for Canada was even (0.0%) in March 2012 versus February and +2.1% when compared with March of last year. That’s a quite modest year-over-year gain and almost exactly matches the latest advance in the all-items Consumer Price Index (CPI), +1.9%. CanaData calculates construction material cost indices based on input weightings of products monitored in the Industrial Product (IPPI) and Raw Materials Price Index (RMPI) series from Ottawa’s statistical agency. A thorough list of material components and their percentage changes over various time frames are set out on the web below. The total construction cost index in March was +1.3% year over year. This was comprised of residential work at 0.0%; Non-residential buildings at -0.8%; And engineering, +3.2%. One primary influence on residential construction costs is lumber, for which prices have moved in a relatively narrow band (-6% to +6%) for the past six years. This restraint can be traced back to early 2006 when the U. S. Homebuilding sector began its rapid descent. That slide is only now bottoming out, with considerable hope for improvement in the quarters ahead. Several of the inputs that are particularly important for non-residential building construction are cement, concrete and steel. The year-over-year change in the cement price index has been in negative territory over the past five months (-0.5% in March). That’s remarkable since not even during the recession did cement prices decline on a year-over-year basis. Ready-mix concrete prices have been more buoyant, +2.3% year over year in the latest month. While they’ve been at that level of change for the past three quarters, they were listless in most of 2009 and 2010. Structural shapes recorded two notorious spikes, in 2004 and 2008. But they’ve been quieter of late. In March, they were +2.6% year over year. Meanwhile, concrete rebar prices have fallen 6.4% year over year. Engineering construction costs are a little livelier because they carry a larger energy component. Asphalt (+3.8%), gasoline (+7.9%) and diesel fuel (+4.9%) have all been staging faster price advances than the overall inflation rate. Probably the biggest factor in modest input cost gains at this time is the reduced scope of construction activity in Asia Pacific. This is the fall-out from the debt problems of Europe, an important destination for emerging-world export sales. Consequently, commodity price movements have been under wraps. It would seem that now is a good time to seek out bargains in construction costs. The foregoing reflects the experience across Canada as a whole. There may well be significant regional differences. For example, Toronto’s hot condominium market is having an impact on material and labour availability. This particular unique situation is expected to begin moderating by the end of this year as government efforts are made to put a lid on the fizz. But another major construction initiative is coming on the Toronto scene, the PanAm Games. Will efforts to complete facilities by the summer of 2015 have a harmful effect on costs? This has relevance not only for the venues associated with the athletes, but also for other construction project that will be occurring within the same time frame. History has shown that construction for major sporting events – the Olympics being the most glaring - can easily lead to jaw-dropping cost overruns. Whether or not that will be Toronto’s experience between now and 2015 depends on several factors, timing and scheduling being front and centre. For starters, will world economic growth recover to the point where commodity prices begin to jog upward with a good deal more vigour than at present? The U. S. Has moved back into its traditional role as leader of world economic growth. 2012 will continue to be a year of recovery, but affairs should begin heating up again from 2013 on. Also worth remembering is the fact there is a great deal of “pocket change” in orbit around the planet. That’s because central bankers have been cranking up the printing presses to pay for debt and stimulate their economies. Speculation is rampant about whether or not this will significantly contribute to inflation further down the road. It probably won’t have much effect until the U. S. Labour market becomes tighter. The current high jobless rate of 8.2% leaves some slack to play with. Will the U. S. Homebuilding sector recover to the point where lumber prices shake off their more than half-decade lethargy? This is likely to occur, if not by the end of this year, then by mid-2013 at the latest. Finally, there is a factor that is nominally under our own control – the proper scheduling of the Games projects so that the work can be done in measured stages. It’s the last minute scurrying around to meet deadlines that can be the killer when it comes to cost overruns. Games organizers certainly know this and their intention is to avoid such a problem. Too many times, in too many countries, however, a giant chasm has opened up between the intent and the reality. Toronto’s Bay Street has acquired an international reputation for being financially prudent. Let’s see if the city can match this standard when it comes to putting on a world-class sporting event. Source: dcnonl