RBC has done amazing job of reviewing construction costs

1. Canada’s residential construction price index has soared 51% since the
start of the pandemic, putting new pressure on home prices amid a
severe housing affordability crisis.
A shortage of workers (particularly in the skilled trades), a stagnant
supply of raw materials and increased input costs have all contributed to
price growth.
Development charges have also spiked alongside higher materials costs
and increases in expected population growth.
More housing starts are required to deliver a badly needed expansion in
housing supply. But these will boost demand for materials, which will put
upward pressure on costs once again.
The bottom line: Longer-range problems will continue to challenge
efforts to expand Canada’s housing stock. Amid construction material
supply constraints, governments will need to keep policy in line with the
broader goal of improving housing affordability.
Construction costs have gone through the roof
The cost of building a home in Canada—or any structure for that matter—
has never been higher. Up 51% since the start of the pandemic (Q1 2020),
the country’s residential construction price index has well outpaced CPI
(+13%). Driving the increase are dramatic jumps in prices for key building
materials like concrete and structural steel, up 55% and 53% respectively
since the first quarter of 2020. Soaring lumber prices in 2021 and early
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2. 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. These fast-growing fees—which increased as much
as 30% annually last year for single or semi-detached units—are indexed to
Statistics Canada’s Construction Cost Index . Given they are intended to
fund the growth component of municipal capital projects, high levels of
expected population growth, alongside inflation, have contributed to the
rapid acceleration of these fees.
Extreme weather, temporary shutdowns squeeze raw material supplies
Low interest rates and a rising population sent the development industry
into a frenzy during the pandemic. But the fierce competition for raw
materials wasn’t met with a rise in production. In fact, production of these
critical goods declined between Q1 2020 and Q1 2023—with lumber
production falling 11% and production of lime, a critical input for cement,
dropping 20%. While several environmental challenges (including heavy
rain, flooding, and wildfires) constrained lumber supply, temporary
shutdowns of cement plants in Ontario, B.C. and Alberta have hampered
production of cement.
But these aren’t the only challenges aggravating the construction industry.
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3. Higher input costs (such as fuel and transportation) have disrupted
production, while robust demand and a shortage of workers have created
serious imbalances in the jobs market. Labour costs have soared as high
vacancy rates in construction exceed overall rates. High vacancy rates in
construction jobs have exceeded overall vacancy rates since at least Q4
2020—and sent labour costs soaring. Wages in the sector grew 9.4% in
2022, nearly double the pace of other industries.
Longer-term issues will continue to challenge builders
Reining in construction costs to deliver more affordable and attainable
housing won’t be easy. In the near-term, a lull in homebuilding and the
resolution of production issues at cement plants are likely to ease pressures
to some degree. We expect housing starts to dip 10% this year across
Canada, which should temporarily soften demand for materials.
But significantly ramping up homebuilding over the medium to longer term
will keep costs elevated. 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).
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4. Excellent 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. But it remains to be seen if they will succeed at curbing construction
cost growth. While development fees and levies are intended to enable the
growth of municipalities, governments need to be mindful of their impact on
construction costs. Fees need to be consistent with the broader goal of
improving the affordability of housing.
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