The price of new housing is climbing at a torrid pace – The Globe and Mail

Matt Lundy -Economics
Published June 18, 2021

The price of new homes is rising at a blistering pace, tied to voracious demand for housing and supply chain troubles that are resulting in sharply higher costs of building materials.

At a national level, new home prices rose 11.3 per cent in May from a year earlier, the largest 12-month gain since 2006, Statistics Canada said Friday. Prices had risen in all of the 27 major marketsit surveyed. The Ontario metropolitan area of Kitchener-Cambridge-Waterloo saw the largest increase at 27 per cent, followed by Ottawa (24.8 per cent) and Windsor (20.6 per cent).

Home-buying activity has been fiery over the COVID-19 pandemic, including for new builds in suburban areas, adding to price pressures in that segment of the market. Beyond that, developers are reporting that rising construction costs are factoring into higher prices, Statscan said.

Notably, the price of softwood lumber in May soared roughly 235 per cent, year over year, owing to supply shortages. Lumber alone is adding tens of thousands of dollars to the price of new home builds.

“Western Canada has been especially hard hit by building material shortages due to supply chain issues at lumber and steel mills, as well as rising transportation costs within Canada, and higher U.S. import duties,” Statscan said.

In recent weeks, the price of lumber has fallen sharply as the market comes into greater balance, offering some relief. Still, the supply issues don’t end there: Builders are struggling to source everything from PVC pipes to windows.

To that end, the price of new home structures has climbed 12.5 per cent over the past year, outpacing the rise in the price of land (7.9 per cent). The resale market has been even hotter, with the average sale price surging 38 per cent since May, 2020.

New homes are one of the few areas where Canada’s rollicking real estate market is having a noticeable impact on inflation figures. One component of inflation is the homeowners’ replacement index. This is a measure of depreciation, looking at the hypothetical cost of replacing lost value in a home.

To determine that cost, Statscan looks at the price of new structures, and earlier this week, the agency reported the replacement index had risen 11.3 per cent in May, the largest annual increase since 1987.

Even so, the price of owned accommodation was up a mere 3.5 per cent. That’s largely because of methodological reasons: Statscan treats owned housing as an asset, rather than a consumer good. Therefore, it excludes major costs in acquiring a home, such as the down payment.

Despite the torrid activity of the past year, recent figures suggest the housing market is cooling somewhat, with national resales volume dropping for two consecutive months. Statscan noted Friday that monthly price growth for new homes had slowed in the Toronto, Vancouver and Montreal areas.