During the thick of the European Union referendum in June, a lot of financial experts and property market professionals predicted dire consequences that would follow a Brexit vote. Even former chancellor George Osborne predicted house prices could fall as low as 19%. Months later, those ominous warnings have been debunked by a steady market growth.
Unfortunately, while the price of housing appears to be enjoying some growth, -with the Office for National Statistics (ONS) reporting a 1.4% growth in August– the construction industry has been hit hard by rising building supply costs. This is due to the fact that construction sector is particularly sensitive to business investment, meaning the more shares and equity dwindle, the less likely property investors are to build new property.
The hardest hit by this incidence is Scotland whose latest quarterly publication Scottish Construction Monitor, reported a significant rise in the cost of bricks, timber and other metal products used in the development of windows and doors.
The Scottish Building Federation (SBF) said many firms believe suppliers could be using the economic insecurity as an excuse to raise costs artificially. In a survey conducted by the SBF among construction firms, 60% of respondents believed that Brexit was responsible for increased cost of materials, while 90% said they expected costs to continue rising over the next 11 to 12 months.
But why is the construction industry the main recipient of Brexit impact? Here are a few suggestions:
Shortage of Skills
The construction industry relies profoundly on foreign migrant labour for skilled and non-skilled work. Perhaps, outside of the EU, with no guarantees of free movement across borders, there could be an exacerbation in the shortage of skills. This means if immigration is cut short, specifically among skilled workers, the UK could experience an increase in costs of projects where demand for labour exceeds supply.
The ripple effect could be the inability of construction companies to meet government housing target, including labour specifications and supplies output. The further decline in housebuilding could force increase in the price of materials which is probably what is happening in Scotland now.
Import and export of construction materials
In addition to the free movement of people, the EU membership permitted the free movement of goods within the European Union, removing the need for duties and similar restrictions. All these benefitted the construction industry.
A study in 2010 performed by the Department of Business Skills and innovation proved 64% of building materials were imported from EU countries. Brexit could mean import duties, and that means more costs to bring these materials into Britain. Likewise, 63% of building material exported to EU countries (revealed by the same study) might encounter restrictions, too.
As an EU member, the UK could access funds from the European Investment Bank (EIB) and the European Investment Fund (EIF). Both institutions had, over the years, invested up to €7.8 billion in significant infrastructure projects, and lent €665.8 million in small and medium enterprises, respectively last year. Losing these streams of income could have a major impact on big infrastructure projects and Startups all over the UK.
Scotland may just be the beginning. Is the future of the industry going to get better, what are your thoughts?