I thank the Chair, Deputies and Senators. The Society of Chartered Surveyors Ireland welcomes the opportunity to share our insights on the proposed concrete block levy with the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach. As the leading professional body for chartered surveying professionals working in the public interest our members work across the built environment, in both the public and private sectors, providing real-time independent evidence of the current inflationary costs and the impact of increased construction costs.
The value of construction output is estimated to be €29 billion in 2022 according to Ernest & Young Economics, with employment levels in construction expected to continue to grow beyond levels of 150,000 people. Demand remains high across many sectors, though many projects remain challenged by increasing construction costs. With regard to residential construction, the Central Bank estimated that 24,500 new homes will be delivered this year, which is well short of the 33,000 needed annually to meet demand as outlined in Housing for All. To make up the annual deficits in supply from previous years, new housing output will need to steadily increase up to 45,000 units per annum by the end of the decade if housing targets are to be achieved in the lifetime of the plan.
The negative impact of Brexit and the cost on housing delivery over the last couple of years has been compounded by the tragic conflict in Ukraine and its impact on energy costs. While the sector and the industry has successfully overcome the challenges of the current high construction cost inflation to deliver almost 70,000 homes during this period, there is significant concern that the current increasing costs are pushing planned developments out of viability.
The national SCSI tender price index is running at 14% inflation for commercial construction to July 2022 and the largest contributor to tender inflation over the past 12 months is material price inflation. All building materials experienced some degree of inflation. Rising energy costs have had a significant impact on energy-intensive materials such as steel, aluminium, copper, concrete and cement, facades and curtain walling, which have been affected the most. Many companies are also grappling with increased inflation generally and increased operational costs, including labour costs.
Given the shortage of construction workers, spiralling construction costs and rising interest rates it is vital that the Government does everything possible to drive down construction costs and the SCSI has made a number of recommendations on how this could be achieved, most recently in our submission to Oireachtas Joint Committee on Housing, Local Government and Heritage on 24 May, which is appended to our submission. The cost of housing delivery is split between soft costs and hard costs. The hard costs are the bricks and mortar element of development, which account for 48% of the overall delivery cost. The other 52% of costs are soft costs, such as levies, margin, VAT, finance costs, connection costs and charges, etc.
The construction sector has witnessed sustained high material price volatility in the past 18 months and since September 2021 the price of concrete has increased by approximately 37%. The highly energy-intensive production process associated with concrete is a driver of concrete price increases. Therefore, the future price of concrete is linked to energy and fuel prices, which are currently difficult for market experts to forecast. The SCSI will monitor the impact on prices of cement and other construction materials closely in the coming months.
The construction sector is functioning with huge uncertainty about the pipeline of construction projects as viability remains so challenged. We have numerous anecdotal examples of housing projects being paused or are being cancelled outright. It is the long-standing view of the society to tackle rising costs of construction. Every facet of the input costs of residential development needs to be reduced. While several initiatives already under way to address the blockages to housing delivery and these are to be commended, such as planning reform, these are longer term and what is required now is urgent action to address construction cost inflation.
Contrary to the need to drive down construction costs, the concrete levy announced in budget 2023 directly increases building costs. While we understand that Government intends to seek a contribution from relevant stakeholders to the cost of remediating defective homes, however in a period of hyperinflation the introduction of a levy on concrete will further challenge the viability and affordability of construction projects, including new homes, and the construction sector in general. Housing delivery is intrinsically linked to viability and increasing construction costs that threaten viability can result in projects being paused or even cancelled. The SCSI estimated that the initial concrete levy announcement, as part of budget 2023 would add approximately €3,000 to €4,000 to the overall delivery costs of an average block built three bed semi-detached house, the most common house type in Ireland.
The levy has now since been revised to 5% and precast concrete elements have been removed.
However, there is still limited detail as to how the levy will be applied. The table attached to our submission is an approximation of costs based on the information available at the time. We estimate the cost of a three bedroom semi-detached house with a 5% levy will increase by approximately €1,200 per unit. A three bedroom semi-detached house with timber frame construction will increase by approximately €700 per unit. More important is the impact this levy will have on the construction sector for other building projects across the country. A large regeneration project with a mixed scheme of offices and retail over a single level basement in Munster will have an increased capital cost of around €350,000. The cost increase for apartment developments ranging from 160 to 275 units with or without a basement will be somewhere in the region of €400 to €700 per unit.
The Society of Chartered Surveyors Ireland, SCSI, has long called for an independent assessment of new and existing regulatory and compliance measures. With regard to a three bedroom semi-detached, a key recommendation of the SCSI real cost of new housing delivery reports in 2016 and 2020, was for a full independent cost-benefit analysis to be carried out ahead of any new regulatory and statutory measures that will impact on the overall delivery costs of new housing. One of the recommendations from the expert group that prepared the defects in apartments report earlier this year highlighted that the concept of an industry levy requires careful policy, legal and public scrutiny and should be considered as part of an option particularly in the context of other similar industry levies under consideration. The expert group further stated that Government Departments and agencies, including the Revenue Commissioners, have been working to identify and evaluate a range of options with regard to such a levy. It is envisaged that the views of relevant stakeholders will be sought before a final decision on the proposed levy is made.
It is imperative that where any changes are likely to increase the cost of construction there should be engagement with the sector beforehand. The SCSI recommends that consultation commences with the industry to discuss workable solutions to meet the Government's stated objectives while ensuring delivery of much-needed homes in the public interest. We are happy to provide any further information or clarifications that may be required.