Houses for sale in Ottawa

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Surging construction costs in Canada are putting new pressure on home prices, worsening a severe affordability crunch, according to the nation’s largest lender.

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A gauge of residential construction prices has risen 51 per cent since the first quarter of 2020, outpacing the 13 per cent gain for the consumer price index, Royal Bank of Canada economists said in a report published Wednesday.

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“The cost of building a home in Canada — or any structure for that matter — has never been higher,” the economists said in the report, citing “dramatic jumps” in concrete and structural steel prices since the start of the pandemic along with soaring lumber prices in 2021 and early 2022.

The increase in building costs comes as Canada grapples with high home prices and rents, an immigration-driven population boom, and shortages of workers and raw materials — all of which are adding to homebuying challenges.

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The elevated costs have contributed to a decline in new home construction in the past two quarters. That’s a problem because population growth is accelerating.

Labour costs have soared during a period of high job vacancy rates within the building industry, according to RBC economists. Wage growth in construction was 9.4 per cent last year, more than double the pace of other industries, they said.

“Inflation could be tamed by increasing the supply of skilled workers,” the report’s co-author, Rachel Battaglia, said in an interview. She suggested Canada lean on a federal government program designed to attract skilled immigrants to ease the construction industry’s labor shortages.

Extreme weather has also hurt availability of critical building materials, driving up prices. Heavy rains, flooding and wildfires have constrained lumber supply while temporary shutdowns of cement plants in Ontario, BC and Alberta have hindered production, according to the economists.

“In the near-term, a lull in homebuilding and the resolution of production issues at cement plants are likely to ease pressures to some degree,” the report said. “We expect housing starts to dip 10 per cent this year across Canada, which should temporarily soften demand for materials.”

Such relief may be short-lived.

“Significantly ramping up homebuilding over the medium to longer term will keep costs elevated,” the economists said.

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