Cost Management Report

January-March 2024 issue.
「Main Scenario for 2024 Construction Prices: Continued Rise Despite Slowing Momentum; Upside & Downside Risk Awareness is Warranted」

Scroll Down

This report has been prepared by the Cost Management Group of the Architectural Design Dept. of Nikken Sekkei Ltd for information purposes. While the information in this report is current as of the date of publication, its completeness is not guaranteed. The contents are subject to change without notice. Unauthorized reproduction of this report is prohibited.

CATEGORY

RELATED EXPERTISE

Main Scenario for 2024 Construction Prices: Continued Rise Despite Slowing Momentum; Upside & Downside Risk Awareness is Warranted

Construction prices are expected to rise moderately in 2024

Construction prices (NSBPI*¹) rose 40% in the two years through the end of 2023. The high rate of increase continued due to soaring materials prices resulting from rising raw materials costs, rising labor costs due to labor shortages, and a widening supply-demand gap driven by excess demand. In 2024, materials prices will remain flat, labor costs will continue to rise, and the supply-demand gap will also stay flat. While it is highly likely that the slope of the rise in construction prices will moderate, the increase will nevertheless continue (Figure 1). Upside and downside risks exist for each factor, necessitating caution.

Materials prices will remain high

Even after the corporate price index leveled off in the second half of 2022, prices for building materials continued to rise in 2023 as companies passed them along in construction costs. The gap between the purchase price diffusion index (DI) and the sales price DI has been narrowing, illustrating this pass-along effect, and the corporate price index is expected to remain unchanged in 2024. On the other hand, the risk remains that external shocks could lead to supply constraints and other factors that cause materials prices to soar.

  • Fig.1: 2024 Construction Cost (NSBPI) Forecast Fig.1: 2024 Construction Cost (NSBPI) Forecast
    Source: Nikken Sekkei

  • Fig. 2: Construction Industry Selling Price & Purchase Price DIs (Large Companies) Fig.2: Construction Industry Selling Price & Purchase Price DIs (Large Companies)
    Compiled from the Bank of Japan's Corporate Goods Price Index.

Labor supply constraints will continue due to labor shortages and the "2024 Problem“

Labor costs continue to rise against the backdrop of labor shortages. The DI for employee headcount indicates that the labor shortage in the construction industry has progressed more rapidly than in other industries since 2013. It is currently at a record high level (Figure 4). Labor costs are expected to continue to rise due to competition for limited labor resources, coupled with the “2024 Problem”*². On the other hand, if the supply-demand gap is resolved, it is possible that wages may merely rise alongside inflation levels.

No progress in eliminating the widening supply-demand gap

The sum of real private-sector housing investment and real private-sector equipment investment in 2024 and 2025 are expected to rise 0.3% and 1.8%, respectively, from the previous year (Figure 5). The supply-demand gap is expected to remain unchanged against the strong investment backdrop. However, it is necessary to consider the downside scenario, in which the supply-demand gap disappears due to such factors as the suspension of construction plans due to soaring building costs, or a decline in investment appetite due to rising interest rates.

  • Fig. 3: Corporate Goods Price Index Fig. 3: Corporate Goods Price Index
    Compiled from the Bank of Japan's Corporate Goods Price Index and the Japan Center for Economic Research's Short-term Economic Outlook.The index for construction materials (intermediate materials) is based on the 2015-based index by stage of demand and by use, and is compiled from the list of item classifications and weights.

  • Fig. 4: Employment DI (Large Companies) Fig. 4: Employment DI (Large Companies)

    Compiled from the Bank of Japan's ”Tankan” quarterly poll of business confidence.

  • Fig. 5: Trends in Real Private-sector Housing Investment & Real Private-sector Equipment Investment Fig. 5: Trends in Real Private-sector Housing Investment & Real Private-sector Equipment Investment

    Source: Japanese Government Cabinet Office’s Preliminary Quarterly GDP Report, and the Center of Japan Economic Research’s Short-term Economic Outlook.

Composite Index Continues to Rise as Momentum Weakens

The Nikken Sekkei Standard Building Price Index NSBPI*1

The composite index rose about 3% from the previous quarter, continuing its upward trend, although momentum weakened somewhat in the Greater Tokyo, Kansai, and Tokai regions (Figures 6 and 7). Among construction work types, temporary construction, framing and finishing prices rose.

Regarding MEP work, labor costs and specialized building costs moved higher. The overhead cost ratio also continues to rise due to the "2024 Problem" and other factors.

  • Fig. 6: Changes in NSBPI Fig. 6: Changes in NSBPI

  • Fig. 7: Percent Change in NSBPI & Building Work, MEP Work Contributions Fig. 7: Percent Change in NSBPI & Building Work, MEP Work Contributions

The NSBPI and the Construction Research Institute's Building Cost Index Show Divergence

Comparing the NSBPI and the Construction Research Institute's Building Cost Index for construction and MEP work, the difference between the two indices over the previous quarter is significant for MEP (Figures 8 and 9).

Unlike the Building Cost Index, the NSBPI covers construction costs, including sales decisions such as the willingness of contractors to accept orders. It also incorporates upward revisions in general contractors’ estimates due to the bullish order-taking stances taken by specialized contractors and MEP subcontractors for automated controls and fire extinguishing equipment, etc. due to their busy work schedules.

  • Fig. 8: Quarter-on-quarter Change in NSBPI vs. Building Cost Index Fig. 8: Quarter-on-quarter Change in NSBPI vs. Building Cost Index
    Compiled from Nikken Sekkei data and the Construction Research Institute's Building Cost Index.
    The quarter-on-quarter change is the quarterly rate of increase or decrease for both the NSBPI and the Building Cost Index.

  • Fig.9: Quarter-on-quarter Change in NSBPI vs. Building Cost Index for MEP Fig.9: Quarter-on-quarter Change in NSBPI vs. Building Cost Index for MEP
    Compiled from Nikken Sekkei data and the Construction Research Institute's Building Cost Index.
    The quarter-on-quarter change is the quarterly rate of increase or decrease for both the NSBPI and the Building Cost Index.

*1: The Nikken Sekkei Standard Building Price Index NSBPI: an index that shows movements in construction prices, calculated independently by Nikken Sekkei. Using standard leased office space as a quantitative model, construction prices are calculated and indexed to reflect actual prices identified periodically via independent surveys. The first quarter (Q1) is January to March, Q2 is April to June, 3Q is July to September, and 4Q is October to December.

*2: The problem of overtime limits, as they apply to construction and logistics industries, from April 2024.

RELATED ARTICLES

This website uses cookies. By continuing to use this website, you agree to the use of cookies. Our cookie policy.