By John Devine
Special to Ontario Construction Report
As the cost of building materials, particularly lumber, continues to spike, builders are feeling the impact not only in terms of product availability, but also from the nature of fixed-price contracts of the residential construction sector, leaving them at risk if prices jump even higher than anticipated.
Kevin Lee, CEO of the Canadian Home Builders Association (CHBA), told The Report that those fixed-price contracts make it very difficult to price a home in a market as volatile as the current one, and that builders are trying to secure pricing by ordering materials ahead of time. He added they are also limiting pre-sales and pulling building lots from the market until closer to construction time as they can’t effectively price the finished product due to cost volatility, nor can they be sure about construction timelines.
Reasons behind rising costs of materials
“For example, one leading builder-developer in Ontario has stopped the pre-sale of new homes until they can more confidently price construction, after having previously had to raise the cost of their new single-family homes by an average of $30,000 and townhomes by $7,500 in response to higher input costs,” says Lee.
“Price volatility, combined with builders reducing pre-sales and the resulting reduced supply in the marketplace, is further driving up prices for those houses that are available in the already under-supplied housing market, contributing to new and resale year-over-year price increases in many markets. We are seeing that play out now, with escalating prices across the country.”
According to a CHBA survey of Canadian builders, escalating lumber prices would result in a 2,200-square-foot home seeing, on average, an additional $19,000 in costs.
“Depending on the size of the house, increases are running from $11,000 to $30,000 or more. And this is just the impact from the price of lumber. Construction delays resulting from a lack of supply are also adding costs, as are price increases on other materials and labour shortages,” says Lee.
Lumber prices, according to the Ontario Home Builders Association (OHBA), “skyrocketed” last July, before coming back to earth in November, and then making a steady climb into 2021; citing a Canadian Imperial Bank of Canada (CIBC) report, the association said the cost of lumber products is now more than triple what it was before the pandemic hit, reaching about $1,000 (USD) per-thousand board feet.
The price of a standard eight-foot, two-by-four of spruce wood is now 2.5 times higher than it was in March 2019, when it sold for $3.97. Last March, the cost was $4.78, and this March it was $10.64.
“CIBC analysts predict that amid low lumber inventories and an ‘inability of the industry to surge capacity’ as a result of pandemic-related labour disruptions, record prices are expected to rise,” says the OHBA.
An unprecedented demand for materials caused by limited supply, especially for pressure-treated wood, pandemic shutdowns in the lumber industry, and a mild winter that allowed construction to continue, all combined to squeeze supply chains, said the association, adding there has also been increased demand from renovators as people spend more time at home. And just like last summer, they are seeing supply shortages.
“Many contractors are pre-purchasing their fence and deck materials and storing onsite so that they have what they need when they go to construction in a few months. Building outdoor structures is going to be more challenging this summer, as shortages are already starting to occur.”
Other issues that have contributed to price hikes include the closing of the US/Canadian border, transportation issues, and shortages of wood fibre, says Lee, adding other materials are also seeing spikes, but not to the same degree as lumber.
“The same (issues are) being experienced in the United States, and with the North American lumber market being integrated, extremely high demand and lack of supply are driving up prices both north and south of the border. These issues are not exclusive to Canada … the construction boom and materials shortage resulting in higher prices is being experienced in developed countries around the world.”
Rising costs are also contributing to an average delay in housing construction of about six weeks, adds the OHBA, making it a significant challenge for builders to manage projects in a timely and cost-effective manner. It’s also proving to be challenge helping homebuyers understand the impact of these rising costs, adding to the overall price of a new home.
“No one wants to hear that they can’t get the proper materials, or their home has been delayed,” said the association, adding that prices are also up for steel, appliances, plumbing fixtures, windows, doors, and electrical materials. Some builders are reducing the number of homes they build at a time in an attempt to manage risk. “It is very difficult to price your projects if your input costs keep going up.”
Specialty items such as some plumbing fixtures and appliances continue to see long waiting times, and the wait for windows, which used to be three to four weeks, is now eight to 10 weeks. The cost of wood for an average deck has nearly tripled, and the shortages experienced last summer are expected again.
The CHBA expects price hikes will slow in second half of the year, but it’s not anticipated that the problem will correct itself anytime soon, and higher costs for construction materials will be with us for some time.
“The cost to build homes is going up. The price is set against other factors like land costs and market forces, but every increase in the cost of housing gets reflected in the price of that home. There will be in an impact, and beyond that, it may be that consumers will need to cover additional costs during the construction of their home based on the sale agreement,” the OHBA says.
“What will be more concerning to buyers is that the costs get to a point where the number of homes available to buy gets reduced, and now a tight housing market gets tighter with less supply for the real demand we are facing.”
The CHBA, says Lee, is working the federal government and the lumber industry to try and resolve some of the issues behind the spike in construction costs, including maintaining a fully functional supply chain.
“And while Canadian lumber mills are operating near 100 percent, the US mills are still lagging, which is a major factor in the supply shortage (coupled with very high housing starts and renovation activity). It is critical that US mills increase supply to alleviate the shortage across North America … CHBA’s counterpart in the US, NAHB, is actively seeking solutions with the American government.”