Canadian homebuilder sentiment spikes even as costs rise 13% in a quarter

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Canadian real estate demand is skyrocketing and builders are very excited. the Canadian Home Builders Association (CHBA) updated its housing market index this week. The index, a leading indicator of builder sentiment, hit a new record high in the fourth quarter of 2021. While the index is only back about a year, the steep rise was a sharp reversal from previous quarterly declines . Despite higher construction costs, cheap money and buyers willing to absorb the costs are driving strong demand.

Canadian builder sentiment hits record high

Builders of single-family homes have never been so optimistic, according to the index. The segment’s index reached 84.9 in the fourth quarter of 2021, up 7.1 points from the previous quarter. Such a large increase may seem strange at first glance, but it corresponds to the demand for existing homes at the end of the year. Everyone is scrambling to get the latest cheap credit while stocks are low. This naturally stimulates demand for new homes.

Builders of multi-family homes are feeling even more optimistic than builders of single-family homes, climbing more strongly. The segment’s index reached 87.1 in the fourth quarter of 2021, up 9.5 points from the previous quarter. Annual growth in multi-family housing (apartment) starts increased by 31% in November 2021. This demonstrates that strong demand continues to flow across the country.

Canadian builders saw cost of materials increase by $68,000

Despite builders’ optimistic sentiment, there’s bad news for buyers: higher construction costs. Canadian home builders have seen rising material costs add $68,100 to the average 2,480 square foot home over the past 2 years. This is 13% more than the previous quarter, which is a little higher than the 4.7% growth in the CPI used for inflation. It should be noted that the 13% increase is only for one quarter and that end consumers pay for it.

As you might have guessed, most of the cost increase is related to lumber. The average increase in lumber costs accounted for $34,300 of the increase in material costs. The remainder of the material increase is approximately $33,800, excluding lumber. It’s starting to not be so transient.

Increase in the price of housing construction in Canada due to lumber

The average increase in the cost of building a typical 2,480 square foot home across Canada due to the increase in the price of lumber since the start of 2020.

Source: Canadian Home Builders‘ Association; Live better.

Canadian builders have seen labor costs increase by 20% in 2 years

Soaring labor costs are also pushing up prices, in addition to materials. Builders have seen the national average labor cost increase by 20% over the past two years. Growth is even higher in regions experiencing a sudden increase in construction such as Ontario and Nova Scotia. Again, these costs are passed on to the home buyer.

High demand, low inventory and easy credit are a recipe for higher prices. Clearly, builder sentiment is on the rise, especially as buyers are ready to absorb the price hike. As rates rise, it will be interesting to see if the momentum continues. However, it will be months before that happens.

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