Surging construction costs in Canada are putting immense pressure on home prices, exacerbating the already severe affordability crunch, according to the country’s largest lender. A gauge of residential construction prices has surged by 51% since the first quarter of 2020, far outpacing the 13% gain for the consumer price index, as reported by Royal Bank of Canada economists in a recent publication.
“The cost of building a home in Canada – or any structure for that matter – has never been higher,” the economists stated, highlighting the “dramatic jumps” in concrete and structural steel prices since the pandemic’s onset, along with soaring lumber prices in 2021 and early 2022.
These escalating construction costs are adding to the challenges of high home prices, rents, a surge in immigration-driven population, and shortages of workers and raw materials, all of which are contributing to the difficulties faced by homebuyers.
The increase in building costs has also led to a decline in new home construction in recent quarters, which poses a problem considering the accelerated population growth.
RBC economists noted that labour costs have soared amid high job vacancy rates in the building industry, with wage growth in construction exceeding 9.4% last year, more than double the pace of other industries. To tame inflation, the report suggested that increasing the supply of skilled workers through federal government programs designed to attract skilled immigrants might be a viable solution to ease labor shortages in the construction sector.
Picture source: Canva
Extreme weather conditions have also impacted the availability of critical building materials, driving prices up. Heavy rains, floods, and wildfires have constrained lumber supply, while temporary shutdowns of cement plants in Ontario, BC, and Alberta have hindered production.
While some relief is expected in the near-term due to a lull in homebuilding and the resolution of production issues at cement plants, the report anticipates that significantly ramping up homebuilding over the medium to longer term will keep construction costs elevated.
In conclusion, the housing market in Canada faces considerable challenges due to surging construction costs, labor shortages, extreme weather impacts, and a rapidly growing population. Finding sustainable solutions to these issues is crucial for ensuring long-term housing affordability and stability in the country.
To read more local news and market updates please check our BLOG PAGE
Tags: new developments, real estate Vancouver, Vancouver real estate, Vancouver realestate, home sales, Vancouver homes sale, house prices, housing prices, house buying, real estate Vancouver market, Vancouver market, real estate agent Vancouver, Burnaby realtor, Geoff Jarman, Geoff Jarman top Burnaby realtor, 2023 market news, Vancouver Multifamily Market, pre-sale market news, housing market, homebuilding costs
In a recent announcement, the Bank of Canada has decided to increase its target for the overnight rate by 25 basis points, bringing it to 4¾%. The Bank Rate now stands at 5%, while the deposit rate is at 4¾%. Additionally, the Bank will continue its policy of quantitative tightening.
On a global scale, consumer price inflation is gradually decreasing due to lower energy prices compared to the previous year. However, underlying inflation remains stubbornly high. Major central banks worldwide are signaling the need for further interest rate hikes to restore price stability as economic growth softens in response to higher interest rates. The United States is experiencing a slowdown in its economy, although consumer spending remains unexpectedly resilient, and the labor market remains tight. Economic growth in Europe has essentially stalled, but core prices continue to rise. China’s growth is expected to decelerate after a surge in the first quarter. Financial conditions have tightened to levels similar to those observed before the bank failures in the United States and Switzerland.
The Canadian economy outperformed expectations in the first quarter of 2023, with a GDP growth rate of 3.1%. Consumption growth was surprisingly strong and well-diversified, even when accounting for population gains. The demand for services continued to rebound, and there was an increase in spending on interest-sensitive goods. Moreover, the housing market has shown recent signs of activity. While the labor market remains tight, the influx of new workers due to higher immigration and participation rates has been swiftly absorbed, indicating ongoing robust demand for labor. Overall, there is a more persistent excess demand in the economy than previously anticipated.
Bank of Canada Raises Policy Rate. Picture source: Canva
Consumer price index (CPI) inflation rose to 4.4% in April, marking the first increase in 10 months. Prices for various goods and services exceeded expectations. Despite lower energy costs, goods price inflation increased, while services price inflation remained high due to strong demand and a tight labor market. The Bank anticipates that CPI inflation will ease to around 3% in the summer as lower energy prices take effect and the significant price gains from the previous year no longer factor into the yearly data. However, concerns have risen regarding the potential for CPI inflation to remain significantly above the 2% target, as three-month measures of core inflation have consistently ranged from 3½% to 4% for several months, coupled with the persistence of excess demand.
Bank of Canada Raises Policy Rate. Picture source: Canva
Based on the accumulated evidence, the Governing Council has made the decision to raise the policy interest rate. This action reflects their belief that the existing monetary policy was not sufficiently restrictive to restore supply and demand equilibrium and achieve sustainable inflation in line with the 2% target. The Bank’s quantitative tightening policy is working in conjunction with the restrictive monetary stance to normalize its balance sheet. The Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation, paying particular attention to factors such as excess demand, inflation expectations, wage growth, and corporate pricing behavior. Their goal remains steadfast in restoring price stability for the benefit of Canadians.
To read more local news and updates please check our BLOG PAGE
Tags: real estate Vancouver, Vancouver real estate. Vancouver realestate, home sales, Vancouver homes sale, house prices, housing prices, house buying, real estate Vancouver market, Vancouver market, real estate agent Vancouver, Burnaby realtor, Geoff Jarman, Geoff Jarman top Burnaby realtor, 2023 market news, Vancouver Multifamily Market, BC, housing market, bank interest rates, central bank, Bank of Canada, Bank of Canada Raises Policy Rate
