Rising Construction Costs Point to Higher Home Prices in 2017

Rising construction costs due mainly to labour increases may push prices higher for homebuyers in Toronto according to industry analysts, who expect the trend to continue through 2017. According to the IHS PEG Engineering and Construction Cost Index, construction costs have risen for the first time since December 2014. The index is a key indicator for wage and material inflation in the construction sector. Strength was evident in labour markets. This was not as evident in materials or equipment prices, and weakness in those sectors may serve to mitigate the upward pressure on new home prices somewhat, but the Toronto market is expected to remain hot nonetheless.

On the labour front, years of stagnant wage increases have given way to solid growth thanks in part to shortages in certain construction trades. Contractors are reporting a difficult time finding carpenters and house framers, for instance. Emily Crowley, senior economist at IHS Pricing and Purchasing, says, “October’s employment report confirmed what anecdotal evidence has pointed to for some time: the construction labor market is experiencing shortages and the tightening labor market is finally resulting in stronger wage growth.”

As far as construction jobs are concerned, some regions in the United States and the Toronto area fared better than others. The U.S. Northeast and West showed strong growth in labor costs, while relatively flat costs in the Midwest and South. In Canada, labour costs were up in the eastern parts of the country, including Toronto, but remained soft in the west, reflecting the slowdown in the energy sector. But, analysts found that even areas impacted by the downturn in energy markets have experienced a tightening labour market. Recent significant increases in the price of oil may add to the upward overall movement of labour costs, if those hikes show that a sustained recovery is at hand.

An analysis of the latest data shows average hourly earnings for construction workers rose 4 percent year-over-year in the third quarter. That’s the strongest wage growth in the sector since 2009. The higher wages are in line with industry unemployment rates, which are at record lows with job vacancies on the rise, a key indicator that firms are having trouble filling positions.

While good news for job seekers, higher labour expenses tend to push overall construction costs higher, leading ultimately to consumers paying more for the final product.

Hot Condo Market in Toronto

Even before labour costs began rising, the strong demand for condos in Toronto was already pushing housing prices up. According to real estate analyst Ben Myers, the surge in condo demand can be traced to investors buying houses not to live in, but as a place to grow their money.

“It’s a large percentage of the market and much more concerning than foreign buyers, “ he told CBC. Myers estimates foreign purchases in the GTA at between five and 10 per cent of the market.

Many homeowners are using the equity in their own homes to buy another condo as an investment property. This has even led to bidding wars between investors hoping to capitalize on tax advantages, given that mortgage interest payments and renovation costs are tax deductible off earned rental income.

There are other factors creating a perfect storm in terms of pushing up demand and prices. Forbes reports that with a population growth of about 100, 000 a year, a strong economy and low interest rates, condo prices should continue to rise through 2017 in the GTA.

Meanwhile, developers in Toronto are benefiting from a condo market that continues to grow in demand. Case in point, the developments of Sam Mizrahi, a Toronto developer and President and founder of Mizrahi Developments, have enjoyed strong sales, with one of his most recent developments at 128 Hazelton now nearly sold out. Understanding that this is a significant moment in the Toronto real estate market, notably Sam Mizrahi and Mizrahi Developments are also behind the development of The One, a mega tower to be built at the prime intersection of Yonge and Bloor Streets in downtown Toronto.

Meanwhile, a short walk from the development site of The One, prices in Yorkville have jumped from $800 per square foot a few years ago to $2, 000 per square foot today. A study by Re/Max found that sales of condo suites priced over $2 million is up a whopping 42 per cent in Toronto compared with the same time last year. Part of that increase is attributable to foreign buyers and a lower Canadian dollar which makes the Toronto market all the more attractive for outside investors.

These are all trends that could drive real estate values through 2017.

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Boris Dzhingarov

Boris Dzhingarov is a business news writer who covers a wide range of issues.