Soaring costs for construction materials will put a serious dent in plans to boost the nation’s housing supply, according to a new report published by RBC economists Robert Hogue and Rachel Battaglia.
A shortage of workers, particularly in the skilled trades, a stagnant supply of raw materials, and spikes in development charges and levies will also contribute to upward pressures on costs, note the authors.
They expect a lull in homebuilding and resolution of production issues at cement plants will ease the pressure on costs to some degree, but are forecasting a 10 per cent dip in housing starts this year.
However, they maintain reining in construction costs to deliver more affordable and attainable housing still won’t be easy.
“Significantly ramping up homebuilding over the medium to longer term will keep costs elevated,” Hogue and Battaglia write. “Continuing to focus on higher-density development in very tall structures, for example, will push up demand for cement — potentially straining production capacity limits.
“And expanding capacity for cement — or other materials — may be difficult given the environmental impact this would have.”
Even expanding lumber production could be tricky because of climate change and more frequent and devastating forest fires, the authors state.
While efforts have been made to address worker shortages through the launch of the express entry process for skilled trades newcomers and various provincial programs to attract Canadians into the construction trades, the report indicates it remains to be seen if they will succeed.
Overall, the report paints a pretty grim picture for the industry, as higher interest rates are also expected to weigh on demand for new homes and significantly affect the cost of building.
The bottom line?
“Longer-range problems will continue to challenge efforts to expand Canada’s housing stock,” the authors state.
“Amid construction material supply constraints, governments will need to keep policy in line with the broader goal of improving housing affordability.”
While development fees and levies are intended to enable the growth of municipalities, Hogue and Battaglia warn governments need to be mindful of their impact on construction costs and fees need to be consistent with the broader goal of improving the affordability of housing.
According to the report, the cost of building a home in Canada, or any structure for that matter, has never been higher, as the country’s residential construction price index has soared 51 per cent since the start of the pandemic, putting new pressure on home prices amid a housing crisis.
The increase is vastly outpacing the overall consumer price index, which rose 13 per cent in the same period.
Driving the increase are dramatic jumps in prices for key building materials like concrete and structural steel, up 55 and 53 per cent, respectively, since the first quarter of 2020.
Soaring lumber prices in 2021 and early 2022 also drove up costs but have since retreated.
“This surge in raw material prices, together with a ballooning population, has also accelerated increases in the development fees and levies imposed by municipal governments,” the report states.
The fees and levies, which increased as much 30 per cent annually last year for single or semi-detached units, are intended to fund municipal capital projects needed to keep up with expected levels of population growth. However, the report says they have contributed to higher costs.
During the pandemic, low interest rates and a rising population sent the development industry into a frenzy. But the fierce competition for raw materials wasn’t met with a rise in production, the authors state.
“In fact, production of these critical goods declined between the first quarter of 2020 and 2023, with lumber production falling 11 per cent and production of lime, a critical input for cement, dropping 20 per cent.”
While several environmental challenges, including heavy rain, flooding and wildfires constrained lumber supply, temporary shutdowns of cement plants in Ontario, B.C. and Alberta hampered production of cement.
Hogue and Battaglia note there have been other challenges aggravating the construction industry.
Higher input costs such as fuel and transportation have disrupted production, while robust demand and the worker shortage have created serious imbalances in the jobs market.
Labour costs have soared as high vacancy rates in construction have exceeded overall vacancy rates since at least the fourth quarter of 2020 — and sent labour costs soaring. Wages in the construction sector grew 9.4 per cent in 2022, nearly double the pace of other types of industries.
In the face of the RBC report, provincial governments are setting hefty targets for an increase in housing stock.
In Ontario, for example, the provincial target is to build 1.5 million new homes by 2031.
Toronto city council recently adopted a housing pledge to achieve or exceed a target of 285,000 new homes in the next years, which would equate to a 23-per-cent increase in the city’s housing supply over 10 years.