Material supply could put pressure on real estate prices in the long term

With delayed supply chains and rising prices for goods and commodities, pandemic-related problems in the value chain have dominated the headlines for much of 2021 and will continue to do so this year. While these issues are affecting all areas of the economy, the residential real estate market has felt a particularly significant impact.

Building materials have become more expensive. This is having an impact on the construction of new homes in particular and is especially affecting wood as a building material, driving up average sales prices.

For developers, an increase in the price of building materials, compounded by a shortage of labor, can change the entire calculus of a project.

The German companies of Sotheby's International Realty confirm: "The Achilles heel on the market is currently construction costs, time delays due to material shortages and a lack of labor. The current increase in energy prices is also having an impact on the transportation of materials, for example. At all our locations, we are noticing that both properties in need of renovation and plots of land are less in demand. As a result, prices are also rising for existing properties that do not require renovation."

The delayed completion of buildings means that developers' equity remains tied up in existing projects instead of being invested in new projects, which in turn further narrows the pipeline of new buildings and confronts developers with the question of whether new projects can be financed at all. All of this is another factor tightening the inventory and driving up property prices. "Unfortunately, the additional construction costs are passed on to the consumer in the supply chain," said the German Sotheby's International companies.

Demand for premium real estate has generally increased because people are spending more money on housing than before the pandemic. In 2021, the global network of Sotheby's International Realty achieved a record sales volume of 204 billion US dollars, an increase of 36% compared to the previous year (150 billion US dollars). The reasons for this are the resurgence in demand for premium properties in major cities and increasing sales activity in secondary markets and vacation destinations worldwide. The brand's US sales volume grew by 33.8% year-on-year, in EMEIA by 48% and in Germany by 52%.

"The growth in the premium real estate market seen during the pandemic is expected to continue this year, helped by rising inflation rates," concluded the German Sotheby's International companies.