The Cost of Building: How do Rising Construction Prices Affect Home Builders and Buyers?

There’s been much discussion about the rising costs of materials, product shortages and it’s timing with the current phase in inflation. Everything from concrete to flooring, and windows to the shingles on a roof has been affected. This trend has been driven by a combination of factors, including increased demand for housing, supply chain disruptions due to the COVID-19 pandemic, and rising prices for labour and even raw materials like lumber and concrete. If  building, buying or selling real estate in Metro Vancouver or Fraser Valley is on your vision board this year – understanding the outlook on construction costs in 2023 will be an integral part of planning out your projects. To better understand British Columbia’s real estate development and infrastructure construction costs, we’ve put together an overview of cost considerations for building a home in 2023.

Cautious Optimism

Despite the turbulence the construction industry has experienced in these last few years, there is reason for cautious optimism.

An influx of immigration and Canada’s 2023–2025 Immigration Levels Plan.

Set in place to counteract the critical labour shortages and vitalize the economy, the recently announced plan is anticipated to stimulate a strong housing demand, even with a mild recession. The Lower Mainland, BC is home to approximately 61% of all British Columbia’s residents. Projections indicate that between 2020 – 2041, the Lower Mainland will experience a population growth of 1.4% (the highest in the Province).

Let’s also not forget that due to product shortages and shipment delays, there is a large backlog of projects waiting to be completed this year. Supply chain obstacles and inflation appear to be at, or nearing, an inflection point; this potentially will lead to less construction cost volatility in the year ahead.

Hard Construction Costs

Having a current and realistic understanding of construction costs is imperative to help manage development risk and navigate through turbulent economic times.

The direct increase in contractor costs for labour, material, equipment, and services associated with a building project have meant lower profits and increased financial risk.

British Columbia’s housing construction industry saw the biggest disruptions with concrete, lumber and labour shortages.

Concrete

One of the most important materials used in building a home is concrete, and as the cost of concrete rises, it has a significant impact on the overall cost of building a home.

Events like the 2022 Lafarge’s Richmond plant fire that halted production, the concrete workers’ strike that lasted 5 weeks, and the Climate Change policies have all had a rippling effect on the production and supply of concrete.

In 2022, these concrete supply shortages impacted approximately 35 % of Greater Vancouver’s concrete supply. Racy Sidhu, the chairman of Concrete BC and a managing partner YAAT Ready Mix Concrete, explained that the shortage stemmed from short term and long-term challenges. “In the short term, [the] major strike [has impacted] approximately 35 per cent of Greater Vancouver’s concrete supply. Nearly 300 union employees [were] either on strike or refusing to cross picket lines.”

Now with carbon pricing above $100 per tonne, the cost of cement has increased more than a third. Without passing the costs onto the customer, the concrete industry wouldn’t be able to survive.

Lumber

The price of lumber however, hasn’t followed the same trajectory as the cement industry. Lumber prices have dropped considerably since its peak in February 2022. Lumber is a primary component in new home construction in Canada, so the cost of lumber directly impacts the cost of construction. While other hard construction costs are rising, the lower lumber prices have moderated the growth in residential construction costs.

Lumber production has been able to catch up to the demand that was ignited during the COVID-19 pandemic. This, as well as other regulatory factors have caused prices to stabilize. For now, lumber is significantly more affordable than it was for most of the last two years, and lumber stock is readily available.

In his 2023 Lumber Price Outlook, Russ Taylor, Russ Taylor Global, Wood Business & Market Consulting, explains

“BC continues to be the highest cost producing region in North America due to its punitive (and market-lagging) government stumpage charges. In 2023-Q1, stumpage rates will drop further, lowering total costs and making mills more competitive with the rest of North America.”

The permanent closure of both Western Forest Products’ Port Alberni mill and Canfor Corp.’s Chetwynd mill, is evidence of the challenges faced by the industry in today’s market.

With all of this in mind, when it comes to new home construction, it is at the whim of the lumber market. The Lumber market outlook for 2023 is far more stable than in recent years, which could mean good things for those planning on building a home or conducting home renovations.

Labour Shortages

Labour shortages in the home construction industry can put a wrench in the works of building your dream home. When there are fewer workers available to complete projects, as we have seen in recent years, demand for their services increases and this often leads to higher wages for construction workers. This increased labour cost is passed on to the homeowner in the form of higher home construction costs. Labour shortages in skilled trades has been a real challenge for the Metro Vancouver and Fraser Valley home builders. Delays caused by labour shortages in construction projects often increase overall costs due to added expenses such as temporary housing for homeowners and interest on construction loans.

With the Immigration Level Plan set to stimulate immigration in the region, the incoming talent into the Metro Vancouver and Fraser Valley region is anticipated to help mitigate the skilled trades shortage.

What does Rising Material Costs mean for Home Builders?

The rising costs of materials have also meant that more development costs in the Metro Vancouver and Fraser Valley are being absorbed by developers. As costs for materials go up, builders may have to charge more for their homes. Additionally, the substantial fees and levies imposed on developers are also  passed onto consumers, however some developers are implementing efficiencies into their processes to combat the escalating costs.

One potential solution to this problem is to increase the use of alternative materials in construction.

For example, builders are using more sustainable and renewable materials like bamboo and reclaimed wood, which may be less expensive and more environmentally friendly than traditional materials. Another approach has been to find ways to reduce waste and increase efficiency in the construction process. This could include using modular or prefabricated construction techniques, which can help to speed up the building process and reduce costs.

Tall wood buildings are on the rise in Canada and particularly in Vancouver. The recent change to B.C’s building codes has allowed for the design and implementation of 12-storey wood structures, which is is an increase from pre-2020 levels of 6-storeys. By giving the green light to change B.C’s building code, British Columbia, particularly Vancouver, is seizing the green building opportunity while also supporting the forestry industry, a cornerstone of the BC economy. British Columbia’s actions have had a rippling effect on construction practices globally.

In an interview with the Guardian Michael Green, a Vancouver-based architect and vocal proponent of timber buildings pointed out that “The United States has changed its code effectively because of Canada. China is changing its code effectively because of Canada.”

Although the focus of this article is around construction costs, we did want to mention that there is a growing awareness of the need to adopt more sustainable construction practices in the building of homes. There are several ways construction in BC is changing to be more sustainable, and we will dive into this topic in one of our next blog posts.

Are you planning on building a home in the Metro Vancouver area + Fraser Valley area?

Construction costs are stabilizing.

The Bank of Canada’s most recent announcement indicating a potential pause in the rate

hiking, may lead to more normalized housing market conditions and demand this year. As inflation is decreasing, commodity prices are coming back down and the supply chain issues are straightening out, many projections suggest that construction prices should stabilize.

Having said this, while there has been a decline in the general inflation rate, food prices remain high which has led some to speculate we might be in for further rate hikes later in the year.

Despite this unknown, we remain cautiously optimistic.

Depending on the location of certain Lower Mainland housing construction projects, their unique offerings and construction duration, there will be opportunities to maximize your real estate investment.

As the Spring market approaches, we expect an increased appetite for new home construction and sales. The Hardy Project Marketing Group, along with our team of Project Sales Advisors, are here to support you with tailored marketing and sales services, every step of the way.

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