Home construction costs in Canada soared by 51% during the pandemic

Construction for new residential buildings near the Richmond Olympic Oval in Richmond, BC. (Max Lindenthaler/Shutterstock)

As the housing affordability crisis in Canada continues to worsen, especially in its most heated markets of Metro Vancouver and Greater Toronto, a growing major cost factor is exacerbating conditions, particularly for new-build homes.

A new report by RBC Economics indicates residential construction costs in the country have soared by 51% since the start of the pandemic in early 2020. This is well beyond general inflation.

“The cost of building a home in Canada — or any structure for that matter — has never been higher,” reads the market update.

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Land prices in the major markets of Metro Vancouver and Greater Toronto have been a primary factor for the cost of new housing. But the escalating cost of construction presents a curve ball for the key strategy of generating more new housing supply in order to help address housing affordability, which is largely driven by insufficient supply.

It brings to light a wide range of reasons behind the increasingly challenging construction environment, which is a side effect of the pandemic’s disruption to the economy and its induced changes to demand.

Materials have escalated in cost, with concrete prices going up by 55% and structural steel up by 53% since the first quarter of 2020.

While the cost for timber shot up in 2021 and early 2022, there has since been a rewind on the earlier cost spikes.

Analysts state low interest rates earlier in the pandemic and population growth sent the construction industry into a “frenzy,” but the “fierce competition for raw materials wasn’t met with a rise in production.”

Production of materials actually fell over the pandemic period, with lumber dropping by 11%, and the production of lime, a key part of the process to make cement, fell by 20%.

Wildfires, heavy rainfall, flooding, and labour action also affected cement plant operations in BC, Alberta, and Ontario.

Labour costs in the construction industry have spiked by 9.4% alone in 2022, nearly double other industries. The growing pressure on construction wages is also driven by a persistent labour shortage in the industry.

And higher transportation costs, including fuel, have also only added to overall construction costs.

“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,” reads the report.

“Even expanding lumber production could be tricky because of climate change (and more frequent and devastating forest fires).”

With that said, analysts believe the current weakened housing demand — a 10% in housing starts across Canada in 2023 — will temporarily soften costs for materials. Analysts also state the federal government has made “excellent efforts” to address worker shortages through immigration with the launch of the express entry process for skilled trades newcomers, but it remains to be seen if this will help slow down the pace of construction cost creep.

According to the analysts, another area of concern for construction costs is higher development fees and levies by municipal governments. Cities are hiking up these costs charged on builders and developers to account for their own budgetary needs, such as the growing cost of new and improved infrastructure and community amenities to handle a growing population.

These fees and levies by municipal governments have gone up by as much as 30% annually in 2022 for single-family homes and semi-detached units.

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