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A building price index measures the change in cost for both newly constructed homes and individual goods used in construction. Like other price indexes, the purpose here is to track inflation and measure the new cost of consumer goods. In many cases, construction is an indicator of a country’s overall economy. This industry tends to grow and contract sooner than others. When prices increase heavily due to inflation as computed by the building price index, construction companies slow down, and this may be an unofficial sign of economic contraction.
The construction industry typically has numerous segments when reviewed from an economics standpoint. The two largest groups are commercial and residential construction. Below these groups, there is warehouse, school, office, and manufacturing construction in the commercial section. Residential subgroups include single family, multifamily, and investment properties, among other particular groups. Economists often track a building price index for the two overarching groups and the subgroups in each major category.
Inflation is a naturally occurring phenomenon in an economy. Prices rise as demand increases or whenever a central bank or other government agency changes monetary policy, such as money supply or credit terms. The building price index often compares the current year cost of new construction against the previous year. The percentage increase reported by the index indicates the amount of inflation directly related to construction. The index reports a different figure for each section of the construction industry, at least in terms of the types of buildings constructed.
Economists can also use a building price index to look at the individual pieces of construction material that may be the source of inflationary cost increases. For example, free market economies can have resource shortages as the construction of new buildings increases. Concerned individuals often desire this information to determine if the cost increase is due to one or several individual factors. Individual factors may result in short-term price changes. Once more supply enters the market, the cost for construction should go down as reported by the building price index.
Long-term inflationary changes may be the result of overactive governments in a certain industry. For example, changes in regulation or economic policies can drive up the cost of doing business. The building price index reports these changes on an annual basis. The costs of construction will not go down until these changes reverse. Other times, lower demand and less construction may change building inflation as fewer homes built may decrease costs.
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