House buying during the past few years has become a major concern for any household that is still living on a rental property. Especially after 2008 when the property bubble affected the global economy, people have become concerned about not investing conservatively or lavishly in property. However, the year 2020 was interestingly the year after 2008, when the property market was hit by inflation and house building became even more difficult than house buying. Let’s learn about ‘How Much Do Builders Make On A House?’.
How Much Do Builders Make On A House?
House builders now face a tough time as they venture out for earning profit through house building as it is a difficult market for earning profits. As per the National Association of Home Builders (NAHB), the average gross margin that housebuilders were making in 2020 was 18.2% while the net profit was about 7%. Therefore, out of $13.7 million, only $959,000 was the net profit that the housebuilders earned. However, despite the rising inflation in subsequent years (2021 and 2022), house builders have yet not only been able to sustain their profits but also increase them slightly. According to another survey, there has been an improvement in the gross profit earned by housebuilders in 2022 as they smartly passed on the cost enhancement risks to their customers (house buyers).
Factors affecting house builders’ earnings
Prices of building materials
As inflation enhanced, the rise in the prices of building materials like cement, wood, gravel, and iron rods also increased. Among some prominent costs were the demand and supply gaps that were created due to the local pandemic and subsequent ban on transportation. Furthermore, since the labor force globally suffered from lockdowns and health-related concerns, the supply of materials became even more difficult.
Affordability of masses
Revenue matters as the more the people are willing to pay, the more the opportunity for the house builder to earn. Due to the COVID-19 pandemic and subsequent global inflation, many people lost their jobs or at least had a reduction in their disposable incomes. Therefore, a majority could not afford to buy houses. They either moved towards the rental property or shifted to smaller houses. An overall impact was the reduction in masses who readily had the available income to invest in property.
Lending rate offering by banks
It can be said that pre and post-impacts of a crisis are largely manipulated by banks that alter the interest rates and mortgage offerings by observing the ongoing situations. For example, before the global financial crisis, the banks of America lowered interest rates and the masses left no opportunity to invest in property. The result was the historical crash of the market. Similarly, in countries like Canada where the banks lowered interest rates from 1.8% down to 0.3%, people rushed to the property market. However, the effect soon got reversed as the post-pandemic market situation changed drastically. The existing interest rates were doubled putting more burden on the house buyers.
In such scenarios, it remains a big question how the house builders were still able to make a profit. The answer to this has two sides. The first one deals with the public fear of price increases in the future, and this panic buying. Second is the reduced interest rate that the banks offered during and just after the pandemic. Furthermore, people from the areas where the pandemic had hit hard moved to areas where the effects were low. This created a concentration of masses in one region and artificially increased its value. For example, such concentrations can be found in Canadian cities like Calgary that enjoy prosperity. However, such prosperity cannot essentially persist as the global markets now face the highest inflation they have ever reported. The main reasons are the global demand-supply gap of valuables and increasing interest rates offered by banks keeping in view the increasing demand for property.
Conclusion
The COVID-19 pandemic brought tough times to everybody. However, post-pandemic effects on the earnings of house builders remained unaffected and even increased to some extent. This was because of factors like the fear of the pandemic, panic buying, and lucrative interest rates offered by the banks. However, these impacts may not last for long as another evil is uprising-Global inflation.
Frequently Asked Questions (FAQs)
Q1: How can lumber cost impact the builders?
Answer: Builders who entered fixed contracts had to bear the loss as they did not foresee the rising lumber costs. However, the builders who agreed to a cost-plus agreement did not face any loss since they passed on the additional lumber cost to the house buyers.
Q2: Among the non-material costs, which cost had the most profound impact on how much the house builders made during the pandemic?
Answer: Apart from the material costs, labor costs were impacted the most as the pandemic created an acute shortage of labor in the market due to lockdowns. It was a desperate moment when the daily wage laborers were finding jobs while the builders were finding cheap labor to build houses.
