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Inflation bobbing its head

Inflation is back. The real estate sector is seeing its effects, with basic materials such as steel and wood going up strongly. Reasons are manifold, ranging from

supply chain delays to political issues.

For quite a long time, the prevailing view on the financial markets was that the rise in inflation rates was merely a temporary phenomenon. More recently, an increasing number of experts doubt this view. The reasons for the current rise in prices may not disappear from the markets as quickly as expected. Further price drivers could be added. This development is particularly noticeable in the real estate industry.

Steel and Timber with substantial price increases

Since early summer of last year the Covid-19-induced downturn of the real estate industry has reversed dramatically. After a contraction of 4.2% in the spring of 2020, the industry recorded a significant growth in its construction indicator, representing a 2.9% increase compared to 2020 quarter results (Credit Suisse, 2021). Inflation - dormant for over a decade in the economy – is slowly coming back. Prices of essential products needed in the construction industry, such as steel, wood, copper and other metal went up strongly. Timber, for example, increased by nearly 40% since the inception of the pandemic last year, steel/metal by nearly 60% and concrete, cement and plaster by 5%.

Worries about continued material shortage

There are a number of reasons – all interconnected – for the material shortage. Producers, shipping and supply chain industries attribute the material shortage mainly to generally higher demand as well as shipping delays because of a downturn in vessel production, particularly in the Far East. Furthermore, supply chain shortcomings from the Far East to the West and the US are being cited.

During the pandemic the shortage of materials was mainly due to the production downturn around the world. However, after the global economic shutdown, materials factories still face difficulties to obtain certain materials from specific supplier countries. In addition, shortages in the shipping supply chains increased delivery delays, which according to market experts is not to get fixed possibly for several months after the virus itself has subsided (A. Holtmann, Marketing Content Manager at Viewpoint, USA, 2021).

The situation, therefore, worries the European construction industry, such as Great Britain. Based on a recent survey, 98% of UK construction companies are concerned about rising construction material prices (J. Stein, Construction News, UK, 2021). For example, in August, after a COVID contamination among port workers, China closed its major port Ningbo (third busiest port in the world), preventing sourcing and exacerbating the reliance driven by global supply chains.

The political element

But there is more to the story. The situation is not just driven by increased global demand meeting lower supply. There is also a political dimension. Mutual trading tariffs, imposed particularly by China and the USA, add to the shortage.

A review of trade relationships

The mix of pandemic realities and politically-induced shortages will most likely continue to affect construction prices and thereby inflation. With the new leadership in the USA, the new government in Germany - most likely formed by the end of this year – and the upcoming elections in France next spring, there is a new chance to address these challenges. The US, China and the EU need to rethink their trading relationships anew in order to alleviate the pressure on prices and politically induced inflation drivers.

Dr Peter Mörtl

November 2021

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