Renting or buying a house just got tougher, and affordable housing just got a little less affordable with the government implementing the 16 per cent VAT charge on petroleum products. Tenants and buyers will sooner or later have to dig dipper into their pockets, thanks to the expected spill over of rising fuel costs into the builder’s budget.
The construction industry, like many other sectors of the economy is fuel intensive. From excavation, to material transportation to materials themselves, most components involved in putting up a building has to directly or indirectly involve the use of fuel. Even with economies of scale, a slight increase in the fuel prices must occasion an observable effect on the total cost.
A 16 per cent increase however is by no means slight, and the costs have to be covered. All factors being constant, builders have two choices readily available to them. The first and most natural is to pass on the cost of the product to the buyer or user, in this case tenants. The second option is to maintain current prices and wait longer to break even, and there are risks involved.
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The challenge for most contractors will be how to deal with the effect of the fuel levy on existing contracts which may prove impossible to renegotiate. Faced with the prospect of losses, many contractors will try to recoup the losses from the buyer’s end.
A contractor who spends KSh. 1 million on fuel for a particular project will now have to part with KSh. 160,000 more. Most contracts do not provide for adjustments in case of such unforeseen circumstances and the contractor may have to cut back on his profit margins with the potential of making a loss.
Already industries associated with construction like paint makers have shown intent of increasing costs to recover the cost of fuel. Speaking to Construction Kenya, Crown paint CEO Rakesh Rao said “Our product prices will surely rise in the next few days once we have quantified the effect of the new petroleum prices on our business”.
The government earlier this year launched the affordable housing agenda which aims to provide inclusive affordable housing especially to citizens of lower income categories but the fuel levy tax could affect the outcome of the programme if contractors raise prices to recover costs.
With the rise in fuel levy expected to affect the cost of most consumer products and services hence further denting the incomes of workers, to most people the dream of affordable housing may prove to be further from reach.
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