New home prices are rising at a breakneck rate, linked to voracious housing demand and supply chain issues that are driving building material costs soaring.
Nationally, new home prices rose 11.3% in May from a year earlier, the largest 12-month increase since 2006, Statistics Canada said Friday. Prices had increased in the 27 main markets he paced. The Ontario metropolitan area of Kitchener-Cambridge-Waterloo saw the largest increase with 27 percent, followed by Ottawa (24.8 percent) and Windsor (20.6 percent).
Home buying activity has been fierce during the COVID-19 pandemic, including for new construction in suburban areas, adding to price pressures in this segment of the market. Beyond that, the developers are signaling that rising construction costs are factoring in rising prices, Statscan said.
Notably, the price of softwood lumber in May rose about 235%, year over year, due to supply shortages. Lumber alone adds tens of thousands of dollars to the cost of building new homes.
“Western Canada has been hit particularly hard by shortages of building materials due to supply chain issues at steel and mills, as well as rising transportation costs in Canada and rising tariffs. ‘importation into the United States,’ Statscan said.
Over the past few weeks, the price of lumber has fallen sharply as the market clears, providing some relief. However, the supply problems don’t end there: Builders are struggling to find everything from PVC pipes to windows.
To that end, the price of new residential structures has climbed 12.5% over the past year, outpacing the rise in land prices (7.9%). The resale market has been even hotter, with the average selling price increasing 38% since May 2020.
New homes are one of the few areas where Canada’s vibrant real estate market has a noticeable impact on inflation numbers. The Homeowners Replacement Index is a component of inflation. It is a measure of depreciation, which examines the hypothetical cost of replacing the lost value of a home.
To determine that cost, Statscan examines the price of new structures, and earlier this week the agency reported that the replacement index rose 11.3% in May, the largest annual increase since 1987.
Despite this, the price of owned accommodation rose only 3.5 percent. This is largely for methodological reasons: Statscan treats owned accommodation as an asset rather than a consumer good. Therefore, it excludes significant costs associated with buying a home, such as down payment.
Despite the scorching activity of the past year, recent figures suggest that the housing market is cooling somewhat, with the volume of domestic resales declining for two consecutive months. Statscan noted on Friday that monthly growth in new home prices had slowed in the Toronto, Vancouver and Montreal areas.
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