In case you haven’t heard, inflation has been one of the significant economic news stories of the decade. Since 2020, prices for most consumer goods have risen faster than at nearly any time in the past 40 years.
These increases have no single cause, but most can be traced in some way to the disruptive impact of the COVID-19 pandemic and world governments’ responses. Inflation has been a global phenomenon, affecting virtually every country — many in much worse fashion than the United States.
Although increases in grocery prices, insurance premiums, and other “everyday” expenses have been most noticeable for average Americans, costs for more substantial items — like cars and homes — have increased by quite a lot, too.
Some of the most dramatic fluctuations observed anywhere have been in the construction industry, where prices for materials like lumber, shingles, flooring, HVAC systems, and interior finishes spiked in 2020 and 2021. Construction experts noted these trends in real-time, as did real estate developers, home buyers, and homeowners managing their home improvement projects (as many did in those days).
The big question is whether still-high construction costs will decrease meaningfully in the years ahead. There’s no simple answer, but here’s how experts like Allana think about the trends likely to shape material, land, and labour prices in 2025 and beyond.
1. Supply Chain Disruptions Are Mostly Behind Us (But Could Arise Again)
Many of us remember the alarming (and, if we’re being honest, kind of funny) images of a giant ship stuck sideways in the Suez Canal in 2021.
The consequences of that episode were anything but funny, though. The Ever Given ship blocked traffic through the canal for days. Satellite images of ships queued for hundreds of miles back into the Red Sea — and others trying their luck with the much longer passage around Africa’s horn—exposed how fragile global trade flows can be.
The Ever Given made an already tenuous global supply chain worse as the world struggled through the second year of the pandemic. As a result, prices for raw and finished materials, including some construction materials, rose.
The Ever Given was eventually freed but wasn’t the only factor interrupting global trade in 2020 and 2021. Factory shutdowns in China and other “producing nations,” worker shortages in Western countries, and many other problems conspired to increase costs. While there’s no reason to expect these issues to return similarly, they remind us that it doesn’t take much.
2. A Slowing Economy Could Keep Prices in Check
According to the law of supply and demand, prices fall when demand decreases and rise when it increases.
A slowing economy usually causes demand to fall, pushing down prices for raw materials and finished goods alike.
The U.S. economy continues to grow, but it’s showing signs of slowing, and a recession isn’t out of the question in 2025. If that happens, construction activity will most likely fall, and construction materials prices could also decrease. If the country avoids a recession but experiences only modest growth, any price increases should likewise be modest.
Either way, the macroeconomic forecast doesn’t support a big increase in prices for shingles, concrete, masonry, siding, or other basic construction materials.
3. Geopolitical Uncertainty May Affect Certain Raw Material Prices
Stuck container ships aren’t the only cause of global supply chain disruption. Internal and international conflicts can affect trade flows, too, as we saw dramatically when Russia invaded Ukraine in early 2022. The onset of that war sent oil prices skyrocketing worldwide, even though the conflict was isolated to a single country.
Unfortunately, geopolitical uncertainty endures today in Ukraine, the Middle East, parts of Africa, and elsewhere. Prices of raw materials like crude oil, copper, and iron are most vulnerable to conflict-related disruption.
4. Higher Labor Costs (And Supply Constraints) Will Limit Downside Pressure
Higher labour costs in the United States and other Western countries have pushed up the final price of new housing construction and renovation projects, such as re-roofing and kitchen remodelling. Skilled construction labour continues to be in short supply.
Labour is a significant factor in overall construction cost inflation. A slowing economy could relieve pressure on the sector and slow or reverse the trend, but we’re unlikely to see a big drop in wages anytime soon.
5. New Building Codes and More Attention to Resiliency Will Improve Construction Quality But May Increase Costs
Last but not least, the latest edition of the International Building Code contains essential enhancements for building safety, efficiency, and comfort. If they haven’t already, many new construction developers will begin implementing them this year and next. This is good news for building owners and users.
However, many builders believe — with good reason — that these enhancements will increase final construction costs. How much depends on who you ask, but few experts believe stricter building codes lead to lower expenses.
Expect the Unexpected?
Recent history teaches us that even “safe” bets can fail. Five years ago, no one was predicting that a global pandemic would upend supply chains and send prices for raw materials and finished goods skyrocketing.
Yet that’s precisely what happened. Today, with the benefit of hindsight, we can tell ourselves that it was only a matter of time before something like that occurred, and we can be more cautious about making confident predictions that nothing like it will happen again. We know all too well that it can.
Unfortunately, we’re no closer today to being able to predict the timing of a black swan event like the pandemic than we were in 2019. Sure, we can think more creatively about what could happen, but we haven’t developed a crystal ball that can tell us when or where it will begin, let alone the form it could take.
Until such predictions are possible, we’ll be left to make educated guesses about construction cost trends — and anything else that asks us to look forward into the unknown.
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