The Society of Chartered Surveyors Ireland, SCSI, welcomes the opportunity to share its insights on construction costs with the committee. We thank the Chairman and the committee for the invitation to the meeting.
As the leading professional body for chartered surveyors working in the property, construction and land sectors across Ireland, we undertake research on a wide range of economic, industry and practice-related issues in the public interest. Chartered surveyor members of the SCSI work across the built environment in both the public and private sectors, providing advice to clients across the entire life cycle of a build from greenfield site through to design, mapping, budgets, project management, sales, lettings and property management.
As such, surveyors are well placed to provide real-time independent evidence of increasing construction costs and their impact on the sector, including the consequences for housing delivery.
The current housing crisis, with demand outstripping supply, is well documented. It is forecast that the population of Ireland will grow by up to 600,000 in the next ten years, which will place additional pressures on the market to produce a greater selection of housing units of various sizes, not just for growing families but also for those who wish to downsize to two- and one-bedroom apartments. A proportionate number of private and publicly developed units is therefore required to ensure our urban and regional centres are developed in a way that caters for all demographics and family sizes, of varying levels, in a co-ordinated and inclusive manner.
For our economy to remain in a healthy position and to ensure that there is sufficient accommodation for future needs, the housing delivery market should be in a sustainable and well-functioning state. The delivery of new housing units to the market has been playing catch-up since as far back as 2014, when the SCSI flagged to policymakers that the supply of housing to cater for demand was well below what was needed. This has been exacerbated by the lower-than-anticipated new housing output, compounded by the impact of Brexit and Covid over the past couple of years. The tragic conflict in Ukraine and its impact on energy costs are contributing to rises in material prices, all of which are pushing many planned developments out of viability.
The SCSI supports the ambitions of the Housing for All strategy and the many initiatives of the Government aimed at increasing housing supply, including the recent measures to mitigate the high levels of inflation absorbed by the construction sector for public works, including the inflation co-operation agreement. However, our research has identified significant cost inflation across the sector that, if not tackled with a sense of urgency, will result in the ambitious housing delivery targets of Housing for All not being met. The increased construction costs are not limited to urban centres but are evident across the country in every region. It is the long-standing view of the SCSI that if we are to tackle rising costs of construction, including the most recent material and labour hyperinflation, every facet of the input costs of residential development needs to be reduced. While several initiatives already under way to address some of the blockages to housing delivery, such as planning reform, are to be commended, these are longer term. What is required now is urgent action to address construction cost inflation.
Mitigating measures to tackle the high costs of housing delivery will require a proactive and cohesive response from government. Many interventions may be outside the control of government; however, there are many construction input costs that are under the direct remit of local and national government. There is no single solution to driving down costs but the cumulative impact of reducing costs across multiple headings will make a positive overall difference in the delivery costs of housing.
Our submission and its recommendations, which focus on short-, medium- and long-term solutions, build on evidence-based SCSI reports highlighting the critical construction cost areas that we hope will provide some helpful up-to-date insights on how construction inflation can be tackled to ensure the sector meets the Government's housing targets.
To turn now to the specifics of construction, I will draw on some recent SCSI construction cost reports. The detail is in our main submission but I will focus on some key statistics. The SCSI report, The Real Cost of New House Delivery, dated 2020, reported an average increase in inflation of 12% between 2016 and 2020, which does not take account of more recent pressures from increased inflation. Our research found that the cost of delivering a new estate home, namely a three-bedroom semi-detached home, was €330,000 in 2016 and rose to €371,000 in 2020. The SCSI report The Real Costs of New Apartment Delivery, published in 2021, shows that lower-rise suburban apartment delivery costs rose from €155,000 to €177,000 in the four-year period between 2017 and 2021. The SCSI monitors commercial construction inflation through our tender price index, TPI, first established in 1998. The TPI tracks commercial projects over €500,000 and reports that national annual inflation is at 13%. This figure pertains to the year to December 2021. The report concluded that the main reasons for current price inflation are high price volatility across a range of building materials – particularly insulation, cement, plasterboard, metals and fuel – along with labour shortages and the extremely high demand for projects across all tiers as the industry continues to readjust in the wake of the Covid crisis. In respect of the first half of 2022, it is clear that Russia's invasion of Ukraine is having an impact on the prices of materials previously sourced in the region, especially steel and base metals, while it has also led to a dramatic increase in fuel and energy costs.
The data from our report also highlight the other factors present on foot of inflation, such as labour cost increases, following the implementation of the sectoral employment order, which came into effect on 1 February. It is expected that our next report, which is due in June or July 2022, will show the TPI will be somewhat impacted by this.
Management of risk has now become a primary focus for companies to ensure that construction competitions awarded are structured to protect against inflation pressures within the market. Some contracting firms are no longer accepting previous contract risks due to material inflation and are either delaying jobs or selecting jobs where the client is taking on the risk. This is apparent in the private sector.
Our submission addresses each of the input costs of construction, including hard and soft costs, planning and zoning, enabling works and other statutory costs, utility connections and charges, building regulation, labour costs, public procurement and modern methods of construction. It provides specific detail on building materials price inflation. Drawing from the expertise of our surveyor members working across the construction, land and property sectors, we have found the impact of increasing construction costs is clear. The sector is functioning with considerable uncertainty about the pipeline of construction projects as viability remains so challenged across the country. The SCSI has numerous anecdotal examples of housing projects being paused and, in worst-case scenarios, cancelled outright. If this persists, housing completions will not be near the numbers required to meet the Government's targets and to house our growing population. We are now at a pivotal point where considered decisions must be made to take action in the short term in addition to those medium- to long-term initiatives that are already under way and are addressed in our submission, including in respect of land, taxation and vacant properties.
Priority must be given immediately to addressing those construction cost inputs that are within the direct control of the Government. Utilities and local authorities have a significant impact on the speed and cost of housing delivery. As such, they should be appropriately resourced in terms of staffing and funding to assist them to meet targets and improve efficiency. The following key construction cost inputs should be considered: resourcing local authorities and utilities to facilitate faster processing times; the pausing of increases to local authority contributions; the early engagement of Irish Water to avoid costly delays and provide the cost certainty required regarding connection fees; reducing ESB connection and associated site-works charges and engaging earlier with developments to improve visibility of costs and connection timelines; allowing local authorities to approve alterations to specification of buildings that do not materially alter the planning permission but allow for the use of more cost-effective building materials that may be available at the time given the material price volatility; requiring standard compliance with the fire regulations minimum and removing more onerous costly measures not prescribed by regulation; improving public procurement processes to ensure barriers do not exist for smaller operators who will be needed in order to have sufficient capacity in the sector; and reviewing charges and fees associated with other site-enabling works, such as temporary road closure fees and licensing fees.
The impact of these measures would be significant and, coupled with the other initiatives, could be the difference in ensuring the viability of projects and delivering vital housing in the public interest. I am happy to take any questions and provide further detail on these recommendations.
