Paul Fitzpatrick, broker of record at Home Group Realty Inc., has noticed a change in the types of buyers making inquiries at his Guelph, Ontario–based offices. A lot more of them are coming from the Toronto area, and many are interested in a very particular type of product: a newly built detached home.

A new intensity of consumer desire for single-family homes, stimulated by forces unleashed by the COVID-19 pandemic, has put the low-rise home development industry in something of a double bind: it’s being flooded with buyers at a time when developers are especially ill-equipped to meet increased demand. That’s because the COVID-19 pandemic has interrupted vital supply chains, driving up the costs of materials and forcing some low-rise developers to build and sell more cautiously than they have in the past.

“We’re not selling as many presale homes as we normally might, because we have no guarantees on material supply,” says Sue Wastell, president of Wastell Homes, a housing developer based in London, Ont. that specializes in single-family communities. “We’re being a lot more cautious going forward. We’re not releasing too far into the future.”

The construction of new homes in Canada’s suburbs and exurbs is never a quick or easy process. “We already had a shortage of supply well before the pandemic,” says Kevin Lee, president of the Canadian Home Builders’ Association. “It was probably the biggest issue driving up housing prices in our largest urban centres.” But the pandemic has added a new set of complications to the supply side of the new-home market.

Although residential construction has continued throughout the pandemic, new health and safety practices have hampered the process of building homes. Tradespeople can no longer work shoulder to shoulder. Lockdowns have also caused some municipal permitting offices to operate more slowly than they ordinarily would. Developers report delays in flows of building and planning permits, which they say has created additional drag in the construction pipeline.

One of the most vexing virus-related challenges for builders has been getting — and paying for — vital construction supplies. Essential items such as windows and doors have become scarce as home builders in Canada and the United States attempt to keep up with strong buyer demand on both sides of the border. “We’re buying products and having them stored, where we’ve never done that before,” Wastell says. “We’re thinking much farther ahead than we’ve ever done before.”

But the biggest material concern for low-rise builders is wood. Single-family homes are usually framed entirely in timber, which means they require several times the amount of wood, per unit, that would normally be used in the construction of a taller, multifamily building.

Lumber prices, apparently buoyed by increased demand for home renovations and construction during the pandemic, have surged. Some wood products have more than doubled in price. The random lengths composite, a broad measure of lumber price performance, was trading at US$983.80 per thousand board sheets, up around 118% higher from the same period last year.

Valérie Gonzalo, a spokesperson for Lowe’s Companies, Inc., said that increased demand and decreased supply has had an impact on the availability of products to consumers. “Dealing with COVID-19, several suppliers (including lumber, building materials, windows, doors and appliances) were forced to limit their production as they had to reduce the number of employees in their plants to be compliant with the health measures in effect and deal with longer lead times for parts supply,” Gonzalo said.

Developers typically pre-sell properties months or years before the actual start of construction. Now, they’re left to perform an uncertain calculus. If they pre-sell a home today, will future increases in material costs erase their profit margins before they even begin to build? With lumber prices fluctuating so wildly, it’s impossible to know.

Despite the industry’s pandemic-related challenges, Canada’s overall amount of single-family home construction activity has not diminished. Canadian single-detached housing starts in 2020 were up 6% over 2019. But the pace of sales of new-build houses during the pandemic has been so quick that buyers, in some cases, have fewer properties to pick from.

In the Greater Toronto Area, there were just 1.8 months of low-rise inventory remaining at the end of December, according to statistics compiled by Altus Analytics. Toronto-area buyers of new single-family homes haven’t faced such tight inventory conditions since early 2017. In Vancouver, single-family new-build inventory stood at 3.5 months.

Buyers who are put off by inventory problems in the new home market currently have nowhere else to turn, because resale markets are in similar shape. A February analysis by RBC Economics found that Canada’s nationwide resale housing inventory is now the lowest on record, at just 1.9 months.

Whatever new-build houses are available for sale are tending to fetch high prices. Statistics Canada’s New Housing Price Index — which tracks the sale values of detached, semi-detached, and townhouse properties — was up 4.6% year over year in December, the largest monthly year-over-year increase since 2008.

Those rising prices may prove to be a saving grace for low-rise developers whose margins are being squeezed by increased material costs. “If you didn’t have that kind of balancing effect on the pricing side, I think it would be a bigger challenge that it has been,” says Mike Taylor, vice president of business development at Granite Homes, a low-rise housing developer based in Guelph.

Source: Financial Post