Canadian real estate demand is soaring, and it has builders very excited. The Canadian Home Builders’ Association (CHBA) updated its Housing Market Index, this week. The index, a leading indicator of builder sentiment, reached a new record in Q4 2021. While the index only goes back a year or so, the abrupt climb was a sharp reversal from the prior quarterly tapers. Despite higher building costs, cheap money and buyers willing to absorb the costs, are leading to strong demand.
Canadian Builders Sentiment Has Reached An All-Time High
Single-family home builders have never been more optimistic, according to the index. The index for the segment hit 84.9 in Q4 2021, up 7.1 points from the previous quarter. Such a sharp increase may seem odd at first, but it aligns with demand for existing-homes at year end. Everyone is scrambling to get the last of the cheap credit while inventory is low. This naturally boosts demand for new homes.
Multi-family home builders feel even more optimistic than single-family ones, climbing more sharply. The segment’s index reached 87.1 in Q4 2021, up 9.5 points from the previous quarter. Annual growth for multi-family (apartment) starts was up 31% in November 2021. This demonstrates strong demand is still flowing across the country.
Canadian Builders Have Seen Material Costs Rise $68,000
Despite the upbeat builder sentiment, there’s bad news for buyers — higher building costs. Canadian home builders have seen a rise in material costs add $68,100 to the average 2,480 sq ft home over the past 2 years. This is 13% higher than the previous quarter, which is a little higher than the 4.7% CPI growth used for inflation. It’s worth emphasizing the 13% increase is for just one quarter, and end consumers pay it.
As you might have guessed, most of the cost increase is related to lumber. The average increase in lumber costs represented $34,300 of the rise in material costs. The remainder of the material increase is about $33,800, when lumber is excluded. This is starting to feel not so transitory.
Canadian Home Building Price Increase Due To Lumber
The average increase in construction cost for a typical 2,480 sq ft home across Canada due to the price increase of lumber since the start of 2020.
Source: Canadian Home Builders’ Association; Better Dwelling.
Canadian Builders Have Seen Labor Costs Rise 20% Over 2 Years
Soaring labor costs are also pushing prices higher, in addition to materials. Builders have seen the national average of labor costs rise 20% over the past two years. Growth is even higher in regions with a sudden building surge like Ontario and Nova Scotia. Once again, these costs pass on to the home buyer.
High demand, low inventory, and easy credit are a recipe for higher prices. It’s obvious why builder sentiment is on the upswing, especially since buyers are willing to absorb the price hike. As rates rise, it will be interesting to see if the momentum continues. It’ll be months before that happens though.