Global forces hit new house prices - Average price rate hike in Canada highest in 15 years

www.mortgage101.com Thursday, March 20, 2003 By Frank O'Brien Inman News Features

Last year, the average price of a new house in Canada rose 4.1 percent, the highest annual increase in nearly 15 years, according to Statistics Canada.

Yet a unique convergence of global events could cause the price of new homes in Canada to rise much faster this year, according to industry associations and economists.

The oil-industry strike in Venezuela, for example, has already forced up the price of asphalt roofing products and threatens to cause a North American-wide shortage. Asphalt shingles are the most widely used roofing product in Canada, nailed on an estimated seven out of every 10 new houses. Venezuela supplies about 90 percent of the crude oil used for asphalt, notes the U.S.-based National Roofing Contractors Association (NRCA).

"Prices may increase on the order of $30 to $50 per ton, or roughly 15 to 20 percent above their current levels," NRCA executive vice-president William A. Good warned in a February bulletin to members. Contractors were advised to include provisions in on-going contracts to "deal with volatile pricing."

As the price of crude oil increased, there has been heavy demand for paving asphalt, leaving roofing asphalt in shorter supply. There is generally less refining capacity today than in recent years, and there are other products produced at refineries that are more profitable than asphalt shingles, Good explained.

This January asphalt roofing material prices increased from 3 percent to 5 percent in Canada, but as yet there is no shortage of material.

Most builders are more worried about the cost of wood.

Prices for lumber, the most widely used building material by far, have rebounded from the low levels of 2002, notes Toronto economist Peter Andersen, who presented a paper at February’s Canadian Home Builder Association national conference. "Lumber prices appear likely to continue to increase," Andersen said.

Lumber prices have been bouncing over the past year due to a duty on Canadian softwoods heading into the United States. At first a glut of wood appeared on the market as Canadian mills tried to beat the duty. When the U.S. housing market slowed, the price of lumber fell. Lately, Canadian suppliers have cut back on production, but Canadian housing starts surprised most analysts and hit the highest level in 13 years this January. The result is rising costs for two-by-fours and other building lumber.

"Supply issues are currently the main problem facing new home builders," Andersen explained, "Skilled labor shortages, outright shortages of certain building materials and shortages in the availability of land are cited as problems."

There are other global pressures that are hitting home. Threats of a new Gulf War – it may be underway as you read this – are partly to blame for driving the cost of gasoline in Canada to record highs this year. Further, fears of terrorists have increased freight delays at the U.S.-Canada border. All this impacts on the price of transporting building materials – and the end price of a new house.

Finally, the threat of global warming has convinced Canada to sign the Kyoto Accord, which will soon force all new homes to be built to the toughest energy conservation standards in the world. Under federal government proposals, all new homes would have to meet R-2000 standards by 2010. R-2000 homes use about the half the energy of a conventional house. This will result in higher costs to new home buyers to cover everything from more efficient appliances to high-performance windows and extra insulation.

The bottom line for new home buyers: get the best deal you can today because it appears that prices can only go higher.

Frank O'Brien can be reached at fobrien@dccnet.com.