Housing construction costs in YemenAffordability & Purchasing Power [Archives:2008/1135/Business & Economy]

March 6 2008

The substantial problem of a housing shortage is becoming an enduring feature in Yemen. All the same, the response to housing needs was hasty. Construction projects were executed using inappropriate and costly construction and design practices resulting in low-quality housing, causing further escalation in construction and housing costs to prices beyond the financial reach of the majority of the population in Yemen. A report by Dr. Basel Sultan.

Improving the construction and housing sector is essential for several reasons. First for economic reasons, the performance of the construction & housing sector has a considerable influence on the overall economy where it contributes seven to 15 percent of the Gross National Product (GNP). Secondly, for social reasons, because housing is a basic human need.

Third, for environmental reasons in order to reduce the consumption of resources, especially energy, water and natural space, and lastly for political reasons, because success or failure in housing policy is directly felt by the majority of the population who tend to blame the new economic and political system for the lack of infrastructure, shortage of services and the failure of housing production. The production performance of the housing construction industry is determined, first of all, by demand, which is influenced by the following factors: housing prices, household income, housing subsidies, types of the finance or mortgage and tax systems.

The construction industry in Yemen is playing its socio-economic role poorly and inadequately performing its role as a provider for suitable housing units and their associated infrastructure. Some noticeable activities and indications have demonstrated the difficulties that the Yemeni construction industry is having in coping with the rapid urban population growth, which has occurred over the last two decades, as well as the inability to provide substantial housing for low and middle income earners. Taken into consideration with the absence of housing subsidies, housing finance (mortgages) and indefinable housing policies, this has all led to the continuous deterioration of housing investments and conditions.

Even though the income levels of the people are on the whole balanced with the rate of inflation through a rise in salaries, housing construction costs and time rents were moving beyond reach of the majority of the people, where housing rents have increased in a comparable growth rates. Given that the United Nations considers housing rent as unaffordable if it exceeds 30 percent of the average income, it can then be stated here that the cost of renting a house in Yemen has gone beyond the affordable limit of the average Yemeni's income. Owners and housing investors in Yemen justify this increase as a normal response to compensate for rising prices and construction costs.

Construction indicators in Yemen

The problem of the growing construction costs in Yemen is can be fully understood by observing the behaviour of the main construction and material costs along with the purchasing power and other economic indicators over the last two decades.

World Bank statistics on Yemen reported that the contribution of the construction industry to the economy was only 4.2 percent in the year 2000, indicating that, if this low construction output continued to stabilize over the next few years, the construction industry's contribution will continue to be ineffective in terms of its support to the economy and the average standard of living. In nearly thirty years Yemen's economy has failed to change significantly, as the GNP per capita only increased from US $215 in 1975 to US $420 in 2000, an average annual increase rate of approximately two to four percent. This is considered very slow when compared to the local and international growth in prices.

Since 1990, the prices of essential input construction materials such as steel, cement, cement blocks and ready mixed concrete as delivered to the site in the Sana'a area and as incurred by contractors increased by over 13 times. Similarly, the construction costs per unit area (i.e. cost of one square metre for normal type of housing units as incurred by the contractors in the Sana'a area) have increased from around 3,400 YR/m2 in 1990 to as high as 52,000 YR/m2 in 2007, clearly demonstrating that construction prices have increased by nearly 15.2 times.

Equally, the exchange rate increased by 14.8 fold in an analogous relation with prices, particularly during the period from 1990 to 2001.

Conversely, it can be found that the daily rates of the unskilled labour for the same period have increased by only five times. Purchasing power per capita has changed slightly, still hovering around US $800. Local construction prices have therefore grown at a faster rate than the average income.

In conclusion, the development of the construction industry is crucial for leading efficient construction activities and affordable housing, which in return should allow the construction industry to contribute positively to the economy and simultaneously raise living standards and purchasing power. Hence it is essential to stress that the current situation of inefficiency and un-affordability in Yemen imposes the urgent need to use appropriate economic solutions, cost-effective technologies and appropriate construction practices to bring the cost of construction down a level of affordability for the people. Furthermore, there is a need for regeneration in housing policies based on market information, culture and income to provide a sheltered environment for households, instead of succumbing to market forces. If development complications remain unresolved and no solutions are offered to tackle them, the approaches to achieving sustainable and affordable housing construction are expected to become increasingly difficult and the quality of housing will continue to deteriorate.

The Construction Industry and Economy

International reports always state that the more developed the construction industry, the greater the contribution to the economy. Likewise, an increase in construction projects and higher purchasing power means affordable projects. Any reduction in purchasing power will correspondingly affect the construction industry; moreover, if the output of the industry falls, the total investment will decrease. In countries where construction contributes three to five percent to the Gross Domestic Product (GDP), the implication is that unless the construction industry grows faster than the economy as a whole, it might constrain national socio-economic development.

This relationship between the construction industry and the economy makes it clear that the development of one sector cannot occur without the other, although a growing construction industry does not necessarily ensure a developing industry or economy.

The increase in construction prices could, in fact, cause an artificial indication of the contribution of the construction industry to the GDP and economy.

Given that the trends in construction prices influence the construction investment strategy of a variety of interested parties, ranging from private and public clients to construction contractors, property investors, financial institutions, and construction professionals, it is essential to have knowledge of extant pricing issues. For the general assessment of the construction and housing sectors in relation to economic development, knowledge and data are needed for key indicators such as per capita GDP, per capita Purchasing Power Parity (PPP), annual rate of increase in household's income, annual rate of consumer price increases, increase in construction costs, and other related indicators. Such knowledge and data can be used as a tool to compare and monitor the progress made according to the specific solutions required. Moreover, the obtainable data can be helpful to assess various options of policy formulation in the development process.

Dr. Basel Sultan is a professor at Sana'a University's Civil Engineering Department in the Faculty of Engineering.

He can be reached at [email protected]