Rising Building Costs Continue to Threaten Housing Affordability

It’s getting more expensive to build homes, and rising costs could worsen a housing-supply shortfall if developers pull back on projects as a result.

By Josh Sherman | 3 minute read

Earlier this summer, Canadian homebuilders were beginning work on fewer homes than a year ago, and experts predict the downward trend will continue.

Homebuilding costs continue to climb in Canada, according to Statistics Canada, and although increases are moderating, experts remain concerned that elevated expenses will constrain construction when future supply is desperately needed to meet long-term demand.

In the second quarter of the year, Statistics Canada’s housing construction index, which measures changes in residential construction costs over time, climbed 0.8% from the previous three-month period.

“Skilled labour shortages and the resulting increases in labour rates, interest rate pressure and building code updates were all reported as key factors impacting the construction sector in the second quarter,” the national statistical agency notes.

Costs increased quarterly in all 11 markets that the index tracks. Calgary saw the biggest quarterly leap in costs at 1.8% while the Toronto area experienced the smallest at 0.2%.

Some suggest these continually mounting costs will reduce the number of homes that get built, which could further erode housing affordability when homebuying activity picks up again.  

In June, Canadian homebuilders broke ground on 20,509 new units, down 13% from a year prior, according to the Canada Mortgage and Housing Corporation (CMHC).

In separate analysis of the CMHC data, TD Economics warns that the rate of homebuilding will likely continue to slow, in part due to these rising costs. “[W]e believe… [housing] starts will trend lower on the back of weak pre-sale activity in key markets and elevated input costs,” writes TD Economist Marc Ercolao. 

On the ground, Nick Ainis, founder and CEO of Fusioncorp Developments Inc., a Toronto area residential-construction manager, has experienced material and labour inflation first-hand. “The cost of construction — things go up, and they rarely come down,” he tells Wahi in an interview.

During the pandemic, many construction costs soared. With social-distancing rules at warehouses, factories, and development sites, production slowed, creating scarcity in the marketplace — and higher prices.

“It definitely did drive construction costs up,” says J. Justin Kowal, VP of mortgage origination and broker network at Firm Capital, which provides developers with financing. “Lumber mills, mid- to high-rise [development] sites — they were all affected,” he tells Wahi. “This all came down to human capital and how many people were allowed in certain spaces.”


In many cases, the pandemic set a new benchmark, so pricing didn’t drop back to pre-COVID levels after the global public-health crisis ended, he explains. Suppliers or manufacturers either figured out they could keep charging the new prices, or they kept them elevated in response to the rising cost of living. 

However, Kowal and Ainis see positive signs that at least some costs are coming down or stabilizing. Some labour costs are declining, for example. “We’ve noticed that the trades are now hungrier for work,” Ainis says, citing masonry specifically.

The sharp drop in new housing developments in the Greater Toronto Area has more trades out of work, and some are willing to take a pay cut for jobs. “We’re seeing more increased competition for the trades people, and I believe that’s going to have a slight downward impact on the price,” Ainis explains. 

It’s unclear to what extent this will play out in his region, he says, since it depends on when demand for new condos returns.

The price of lumber, one of the main materials for homebuilding, has come down from pandemic highs, Ainis has noticed. “I have not seen any significant changes in any other [material],” Ainis adds.

According to the Statistics Canada report, costs associated with masonry and utilities increased most rapidly from quarter to quarter at 2.4% and 2.2%, respectively.

Ainis notes that construction expenses are just one contributor to the price of a new home. “It’s a combination of many factors that bring up the cost,” he says. 

Many in the industry say the development fees that municipalities charge homebuilders have more of an influence, he suggests. According to the Building Industry and Land Development Association, an industry group representing GTA developers, in many municipalities throughout the region these fees average about $100,000 for a single-family home.

He suggests higher interest rates are taking a toll as well. “I would say they all play a part in affordability,” says Ainis.