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Continued Build cost inflation remains a key concern for the property industry

According to Cushman & Wakefield's latest Q2 Residential Aggregator, out today, the inexorable rise in build costs continues to be one of the main causes for concern in the property industry, with build costs rising by over 6% per annum over the past two years. There was a slowdown in the rate of inflation during the first half of 2014; however, the growth rate has picked up again in recent months and during Q1 2015 costs rose at an annualised rate of 3%.

Costs are coming under increasing upward pressure partly due to the rising cost of material, the price of bricks for example rose by 9% in the first six months of 2015. However, the primary driver of cost inflation is the severe shortage of skills facing the construction industry, which is resulting in significant upward pressure on wages.

Looking ahead the picture isn’t expected to change much over the short term. The latest C&W consensus build cost forecasts predict that costs will rise by 6% in 2015 and a further 5% in 2016, which compares to house price growth in London of 3% and 5%. The continuation of costs rising faster than prices will likely result in stable land prices moving forward.

The recent election campaign bought into focus the countries inability to build enough homes. While London continues to fall short in the number of houses built each year, the number of starts and completions is increasing. The latest figures from DCLG show that the number of homes built in Q1 2015 was the highest quarterly total in three years and there were 9,500 houses started, which is the highest quarterly total in over 25 years.

Jack Simmons, Head of Residential Investment and Development comments: “Q2 15 has been typified by the continued rise in construction starts reaching records levels.  The major challenge though is sustaining this growth bearing in mind the chronic shortage in skilled labour force.  This is having a direct effect on stifling land sales and construction activity for complex, high rise developments, at a time when we are striving to make the most out of London’s restricted land supply.”

Looking ahead the uplift in construction starts is a welcome sign for London; however, with build costs forecast to continue their rise and land in short supply this is likely to be a temporary uplift and will do little to solve the supply and demand imbalance in the capital.