A recent report has highlighted a significant increase in Thailand’s construction cost index, a trend that is expected to have a profound impact on the country’s real estate market.
The construction cost index in the second quarter of 2023 has risen by 6.5% year-on-year, the highest increase in the past decade. This surge is primarily attributed to the rising costs of construction materials, labor, and energy as demand continues to heat up in Thailand’s property market.
The Rising Construction Costs: A Detailed Look
According to the report from Bangkok Biz News, the cost of construction materials such as tiles has increased by 12.5%, while labor costs have risen by 5.8%. These two factors alone account for a significant 39.6% of the standard home construction costs.
This increase in costs is expected to push up the prices of residential properties, affecting the affordability of housing, particularly for first-time homebuyers and those in the lower income brackets.
The report also highlights that the standard home construction cost index for Q2 2023 stands at 134.0 points, a 2.1% increase from the same period last year. However, this increase is slowing down, as evidenced by a -0.3% change from the previous quarter.
In terms of specific construction materials, the price of tiles has seen the highest increase, rising by 12.5% year-on-year, but decreasing by -1.4% compared to Q1 2023. On the other hand, the price of steel and steel products has decreased significantly by -17.8% year-on-year, due to an increase in the global supply of steel and a decrease in energy prices.
The Impact on Real Estate Market
The escalating construction costs are likely to have a ripple effect on the real estate market. Developers may be compelled to pass on the increased costs to buyers, potentially leading to higher property prices.
It could also lead to a suppression of supply as developers may hesitate to embark on new projects due to the increased costs. This, coupled with the unrelenting demand for properties, could further push up property prices, making real estate investment in Thailand an even more attractive proposition.
As we’ve previously discussed, property renovations have surged in Q1 2023, with owners raking in profits from renewed tourism. The increase in construction costs is another indication of this demand, as property owners seek to maximize the value of their existing assets
Foreign investors, particularly those from China, have been playing a significant role in Thailand’s real estate market. As we’ve noted before, Chinese investors have been looking to Thailand for better-value property, even resulting in a near doubling in stock for the publicly-traded Singapore International School of Bangkok due to doubled enrollment.
The rise in construction costs could potentially make Thai properties even more attractive to these investors, as it could lead to an appreciation in property values.
Moreover, the geopolitical situation in Myanmar has led to an increase in interest from Myanmar in Thailand’s real estate market, further fueling demand.
Bangkok, as the capital city, is likely to feel the impact of the rising construction costs more acutely. The city has already been experiencing a surge in land prices, as we’ve highlighted in our previous report on Bangkok’s land prices surge in Q1 2023.
This, coupled with the growing interest from foreign buyers in the luxury market making Bangkok a top destination for luxury property investors, could help to offset any potential slowdown in the domestic market caused by rising construction costs.
The increase in construction costs could further fuel this trend, making Bangkok an even more attractive investment destination.
The city’s luxury real estate market, in particular, has been booming, as evidenced by the luxury real estate boom seen in the Bangkok condo market. The rise in construction costs could potentially enhance the appeal of luxury properties, as they are often seen as a safe haven investment during times of economic uncertainty.
The rise in Thailand’s construction cost index is a significant development that could have far-reaching implications for the country’s real estate market. While it could lead to higher property prices, it could also stimulate renovation activity, attract foreign investors,