The little-known reason housing prices are so high

by Neil Sharma on 17 May 2021

One reason the cost of housing is increasing so rapidly is material costs have skyrocketed, and developers, desperate not to fall in the red on their projects, say they still need to seek out profits.

“It’s tough in the low-rise segment because that’s all lumber, and prices in 2020 went up more than 100%,” said Mike Bowering, president of Mutual Developments. “Lumber would have cost $40,000 for a 2,200 sq ft home, and by the end of 2020 it was over $80,000. Recently, it’s gone up 60-70% on top of that. I can’t say there are a lot of builders making big profits this year.”

In the condominium sector, steel costs have escalated substantially, with rebar alone surging 60% during the pandemic. Bowering says sheet metal outlays are a problem, but he added that high demand for housing has stretched trades thin and now they’re demanding a larger slice of the pie.

“Materials are part of the problem, but the other part is the market is hot and a lot of projects in 2020 that were shelved hit the market this year and they’re selling, and that means trades are so busy that they’re backlogged for about a year. If you wanted to start today, you wouldn’t be able to get a concrete former to start for another year, and they’re the main trades who build condominiums,” he said.

“The market was hot because of demand last year and that pushed prices for houses and condominiums up, and the trades see that and they know they can charge more. This year it’s the opposite: the trades and materials are pushing prices and I see that continuing until at least the end of the year.”

A perfect storm has conspired to not only render housing financially prohibitive for many Canadians, including meagre supply, but it’s also cleaving developers’ profits. For example, Bowering says that concrete comprises 30% of the construction budget of condominiums.

“It’s a tough time for purchasers and developers because prices are going up for condominiums,” said Bowering. “Builders will either not make a profit or they will make a very small profit.”

Fortunately for some developers, they’re protected by contracts signed pre-pandemic, but that doesn’t mean problems don’t frequently arise. John Miolla, vice president of operations at Koler Builders, says that contractors often complain about price escalations and try to renegotiate existing price structures, and while Koler is protected by its pacts, pricing has become so unstable that Miolla has noticed it can change in as quickly as a week.

“We’re experiencing unstable pricing, especially for drywall, steel and, of course, lumber,” he said. “With pricing requests for proposals, you’re typically asked to hold your price for 60 days. At one time in stable markets you could do that, but now we’re getting price increases, in some cases, weekly and to try to hold a price for something more than seven days, some trades don’t want to do it.

“If you did a condo project, or really any project, by the time you get to the planning stage, do your pro forma and put shovels into the ground, it could be a year. How do you plan pricing a year from now?”

Miolla anticipates that erratic material pricing will continue into 2022 and he suspects that COVID-19 isn’t the only thing affecting supply chains.

“People are sitting at home with nothing to do and a lot of home equity, so they’re renovating their houses, and that’s one reason there’s a delay in material,” he said. “The material isn’t just sitting in lumber yards, for example. It affects us because if we can’t get material to get to the construction phase, which might have taken a year but has now been stretched out, that affects the whole timeline, and timelines are critical to the whole process.”

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