Three weeks after China’s coronavirus outbreak shut down large parts of the country, Israel is feeling the first direct impact in its construction sector, with the shutdown threatening to increase the cost of construction and home prices in its wake.
Shipments of stone used for paving and building facades have been suspended and industry sources said that plumbing fixtures, tiles and coatings are likely to follow.
“Suppliers are refusing to ship goods due to a serious shortage of quarry workers in China. The coronavirus is keeping people at home and everything is paralyzed,” said Eran Siv, chairman of the Federation of Renovation Contractors.
He said it would take about two months for the impact to be felt in the Israeli construction sector. “Right now, many of the largest contractors and importers in the country are using existing inventory, but if things don’t get better and soon, the shortage will soon be reflected mainly in marble and stone for cladding and flooring.”
Gil Bufman, chief economist at Bank Leumi, said in a report estimated that between 20% and 30% of all building materials used in Israel are made in China. The result will be higher construction costs in the short run and, if the virus spreads, could lead to shortages that delay building projects.
After nearly a decade of soaring home prices, the market has stabilized since the start of 2018. However, prices have been creeping up this year – about 3.4% in the 12 months through November – while housing starts have been falling, threatening a new supply crunch that could accelerate the rise.
Among the constructed-related materials imported from China are steel, aluminum and copper, granite, ceramics and glass.
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Architects Eran Shaked and Eran Leshem of the firm CityBee said one of the first problem spots is imported granite.
“It’s the most popular stone in the country for gray facades and is widely used. Right now, there’s a shortage of imports because shipments have been stopped and there’s no one in China to talk to, Chinese workers are on enforced holiday until the 23rd of the month and only after that will we be able to resume contact and perhaps find out when the next shipments will be coming,” said Shaked.
Bufman said the impact would depend on how long the coronavirus remains widespread. For that he based his estimates on two main scenarios prepared by the Economist Intelligence Unit.
The first and most likely is that Chinese authorities will gain control of the situation by the end of March. If so, the impact on the Chinese economy will be relatively small, a drop of 0.5 percentage points in GDP growth, and 0.2-0.3% in the global rates.
In the second more pessimistic scenario, which has a probability of 20%, according to the EIU, Beijing will only get the virus under control by the end of June. That would cause considerable disruption in the global supply chain and have a much bigger impact on the world economy.
“In the pessimistic scenario, Israeli economic growth is expected to slow from about 3% in 2020 to just 1.5% along with an increase in the budget deficit and unemployment rate, a drop in inflation and a possible cut in the Bank of Israel’s rate of interest,” Bufman said.
“In the scenario of a persistent virus, the economic impact will be far bigger than it is now. In the building sector, the possible depletion of imported building materials inventories from China is likely to bring a cessation of construction projects,” he said.
Israel would have to begin importing materials from Turkey and other countries, which are more expensive than Chinese imports even though the sources are closer and involve lower shipping costs. “In such a scenario, construction costs will rise, and will get passed on in the form of higher home prices,” he warned.
Bufman cautioned that because other countries are likely to be in the same bind as Israel, global supplies of building materials could grow tighter causing prices to rise further.
As to the Chinese building workers in Israel, Bufman said there was no immediate threat of a labor shortage. No new workers can be brought to Israel for the time being, but last week the cabinet approved extending the permits of the 1,700 workers in Israel until June. They were originally scheduled to return home and be replaced by a cohort of 1,000 others.