Building industry will get ‘tanked’: Crisis is looming as construction costs soar, experts say

The Energy Trap: Why Construction Costs Are Set to Spike

The construction industry is facing a perfect storm. While many view building costs through the lens of labor and land, a more volatile factor is now taking center stage: energy. The intrinsic link between global oil production and the materials used in every home and office means that instability in the Middle East doesn’t just affect the pump—it affects the foundation of our buildings.

Construction is uniquely energy-intensive. From the firing of bricks in gas-powered kilns to the smelting of aluminium and the production of plastics, the industry relies on cheap, stable energy to remain viable. When oil production capacity drops—as seen with recent declines of 22% or more—the ripple effect is felt across the entire supply chain.

The Material Domino Effect

It isn’t just about the cost of transporting materials; We see about the cost of creating them. Several key materials are particularly vulnerable to energy shocks:

• Aluminium: Major producers in the Gulf utilize surplus gas tapped from oil fields to fire smelters. When this supply is disrupted, the material cost of aluminium can “go through the roof.”
• Steel: As global oil infrastructure requires rebuilding, the demand for structural steel for piping increases, driving up costs for the wider construction market.
• Bricks: The production of bricks requires high-heat kilns, typically powered by gas or electricity, making them highly sensitive to energy price spikes.
• Plastics: PVC and PE building products are directly tied to petrochemical costs.

Industry experts, including John Tookey, a professor at AUT’s school of future environments, suggest that these factors could lead to a spike in construction materials by as much as 30% to 50%.

The Financial Squeeze: Interest Rates and Borrowed Money

The rise in material costs does not happen in a vacuum. The construction sector relies heavily on borrowed money to fund projects. When material spikes coincide with rising interest rates, the financial pressure on developers and homeowners becomes immense.

This “double hit” of expensive materials and expensive credit can “tank” the building industry, impacting everything from small-scale residential housing to massive national infrastructure projects. For many builders, passing these costs on to the customer is not always possible, especially in a subdued market for existing homes.

For more on how to manage building budgets, see our guide on managing construction costs during inflation.

The Wage vs. Material Debate

Not all economists agree on the severity of the end-user impact. Some argue that the total cost of a new build is roughly split 50/50 between materials, and wages. If the economy is weak and unemployment is higher, wage inflation may remain low, potentially offsetting some of the material price hikes.

However, this balance is precarious. While labor costs might stay flat, the sheer volatility of energy-intensive materials—such as bitumen for roading and chemicals for timber treatment—creates an unpredictable environment for contractors.

To learn more about the latest industry standards, visit the Building Industry Federation.

Future Trends in Building Supply Chains

As the industry adapts to this “epoch-making moment,” several trends are likely to emerge:

1. Shift Away from Energy-Intensive Materials

The volatility of aluminium and steel may push architects and builders toward alternative, lower-energy materials to stabilize costs and reduce risk.

2. Supply Chain Diversification

Over-reliance on a few global hubs for energy-heavy products (like the Gulf for aluminium) is becoming a liability. Expect a move toward more localized or diversified sourcing to avoid being “hammered” by regional conflicts.

3. Increased Focus on Fixed-Price Contracts

With material costs potentially escalating by 25% or more, the tension between fixed-price contracts and actual costs will increase, leading to more flexible pricing models in the industry.