Canada’s real estate industry is currently at a tense juncture. While markets across the country are experiencing seller’s conditions due to a surplus of potential buyers, Canada’s housing market is getting leaner and its composition is changing. And at the same time that existing housing stock is being snatched up at a record pace, the cost of constructing new is pricier than ever before.
In this article, we examine the factors that are causing construction costs to surge and the consequence to Canada’s housing market.
Cost of construction in Canada: Key takeaways
- In 2021, Canada’s sales-to-new listings ratio has remained in the 60 percent range. This indicates that there are more potential buyers than available housing inventory on the market.
- Because of the disparity between demand and supply, more buyers are opting for new construction. Approximately one in four homes on the market today are new builds. Historically, that ratio has been one in ten.
- Unanswered demand for housing has resulted in steep competition for both new and pre existing homes and costs for both are rising.
- In Canada, lumber prices are up 340 percent year-over-year. The cost of gypsum is up 7 percent from a year ago, steel mill products are up 18 percent, and copper is up 27 percent. There are also increased tariffs on crucial components like steel, aluminium, rebar, and concrete.
- The cost of land is rising. The price for a single lot of land is up 11 percent and new lot supply is down 20 percent from a year ago.
- Canada’s construction sector is in the midst of a worker shortage. About 257,100 construction workers are expected to retire throughout the course of the next decade. Only 227,600 workers are expected to enter the construction labour force during that same period.
- Rising demand for housing in combination with rising commodity prices and a worsening labour shortage is adding thousands of dollars to the cost of building a home.
Rising demand for housing
In spite of the effects of COVID-19, there is plenty of healthy demand within Canada’s housing market. According to the Canadian Real Estate Association, the national sales-to-new listings ratio was 62.4 percent in April 2020, 64 percent in March, and 65.4 percent in February. Though the SNLR has declined slightly month-over-month, these numbers tell us that Canada’s real estate market is favouring seller’s, indicating that there are more potential buyers than available inventory on the market.
Because of the disparity between demand and supply, more buyers are opting for new construction than ever before. According to numbers via CNBC, approximately one in four homes on the market today are new builds. Historically, that ratio has been one in ten.
With so much unanswered demand for housing, competition is steep and prices for both new and pre existing homes are on the rise.
Surging commodity prices
We’ve written before about commodities and how prices of copper, zinc, nickel, and gold rose to their highest levels in a decade last spring, but we yet haven’t addressed the commodities that are linked to construction. In Canada, we’re seeing soaring lumber and wood panel prices in combination with increasing tariffs on crucial components like steel, aluminium, rebar, and concrete.
There are a few reasons why construction commodities are rising in price. On one hand, an article published last year by Global News states that demand for building material has been intensified by the COVID-19 pandemic, with many people homebound and having the time to take on home renovations. A recent report from RE/MAX revealed that more than half of Canadians renovated their homes in 2020 to enhance their lifestyle during lockdown, or to increase its market value for the purpose of sale. And on the supply end of things, many North American mills have been forced to pause or reduce production during the pandemic, which has resulted in a sizable material shortfall.
According to Random Lengths, lumber prices are up 67 percent this year alone. They’re also up a whopping 340 percent year-over-year. Moreover, the cost of gypsum is up 7 percent from a year ago, steel mill products are up 18 percent, and copper is up 27 percent. Meanwhile, the price for a single lot of land is up 11 percent and new lot supply is down 20 percent from a year ago.
A shortage of skilled labourers
According to On-Site Magazine, there are approximately 1.4 million persons employed by Canada’s construction industry. Though that number may seem large, it’s no secret that the construction sector has been in the midst of a labour shortage for some time, owing, in part, to a lack of interest in the industry from students and young workers.
Moreover, this shortage is going to deepen. According to BuildForce Canada, about 257,100 construction workers, accounting for roughly 22 percent of Canada’s construction labour force, are expected to retire throughout the course of the next decade. Meanwhile, only 227,600 workers are expected to enter the construction labour force during that same period.
With less skilled workers on the job, it takes longer for projects to be completed and some projects are canceled altogether. Additionally, physical distancing requirements and workflow interruptions caused by the pandemic caused labour productivity to suffer, contributing to supply chronically falling short of demand.
The cost to Canada’s housing market
Rising demand for housing in combination with rising commodity prices and a worsening labour shortage is adding thousands of dollars to the cost of building a home. According to the National Association of Home Builders (NAHB), surging lumber prices have added $35,872 to the price of an average new single-family home and $12,966 to the market value of an average new multi-family property. Unprecedented prices are also causing builders to postpone or delay projects. According to the Ontario Home Builders Association, rising costs are contributing to an average delay in housing construction of about six weeks.
This upward pressure is expected to continue as the Canadian economy recuperates from the pandemic. On one hand, low interest rates will spur consumer spending, leading to large purchases such as real estate. This will deplete supply and drive up demand for new housing. Meanwhile, Canada’s immigration plan is expected to bring in hundreds of thousands of newcomers in need of all types of housing.
One way property owners can offset the high price tag associated with building materials is by recycling old material for their home building or renovation plans.
With all of this said, there’s more emphasis than ever before on preserving pre existing housing stock. Not only is acquiring older stock far more affordable than building new, but in many cases, buildings constructed decades ago are made of materials that would be far too expensive to use today, such as concrete. Older properties also tend to have more generous square footage. Because of their “good bones,” older buildings also lend themselves well to retrofitting.
Moving forward and considering the trajectory that housing demand will take in the coming years, developers will have little choice but to keep building new, but there’s also the opportunity to optimize the old. Capital renovations can be made to older stock to not only bring those assets up to spec, but improve their marketability and performance potential, all with the hope that decades-old stock can remain active for decades more.
Invest with Crescendo Equity
The great thing about real estate investing is that anyone can get their foot in the door. That said, it helps to be backed by an experienced team of investors. So, get in touch to find out how you can get in on the action and invest through Crescendo Equity. Crescendo Equity is made up of a team of dedicated senior real estate investors committed to identifying high potential assets, repositioning them for maximum cash flow, and offering exceptional investment returns to partnered investors. Find out more about how Crescendo Equity makes real estate investing simple by visiting our website.