Materials Costs on the Rise?

Don Procter

February 2005

Five years ago no one predicted the building economy would still be going strong in 2005 in Toronto. But the latest stats on building permits show that the city has been ever-resilient to hard times. Recession is a word associated with the 1990s, not the new millennium.

It is not entirely surprising that the building boom keeps steaming along: The city is growing by about one million people every decade, making Toronto one of the fastest-growing cities in North America. There’s no sign of a building letup— particularly in the residential sector—for the first half of 2005. That is good news for the wall and ceiling industry where one of the biggest problems continues to be a scarcity of skilled labor.

Kevin Day, president of the EIFS Council of Canada, says the outlook this year for the EIFS industry is good in both new construction and retrofit work. Economic indicators are that housing starts will hold or taper off only slightly, depending in part on what happens with interest rates. Condominium development is expected to remain particularly strong in the inner city, partly resulting from a wave of suburbanites choosing to move into core areas of Toronto. Both high-rise and low-rise condo developments are being built at a record pace.

That is good news for the Interior Systems Contractors Association of Ontario, which is poised to announce lofty expansion plans that will, among other things, address the lack of apprenticeship training space.

But as rosey as the economy is, there is a certain chill in the air—and it is not just the cold weather Toronto is used to in February. The rising cost of construction materials is taking its toll on the building industry.

John Fleming, president of Helyar & Associates, a national construction cost management consultant based in Toronto, says increases in material costs and lack of availability—particularly of steel and some types of wood sheathing—will have a "serious impact” on the prices of new low-rise and high-rise residential construction.

While rising steel prices have largely been driven by demand in China, Fleming points to two other factors: a reduction in coke exports from China, which have delayed additional production, and the activities of commodities traders, "some of whom must have made huge profits.”

With major central banks virtually eliminating core inflation, any significant increases in the costs of residential construction materials will probably result in new home price hikes that could knock a significant number of prospective buyers out of the market, Fleming points out. At the same time, sharply higher costs of serviced residential lots could result in Toronto, further curbing the buyers market.

While the impact of higher prices on demand remains to be seen, if material suppliers substantially hike their prices in 2005, don’t be surprised to see home sales tail off dramatically. "We are resisting making predictions as to the increase or decrease in the cost of individual products because if we do, the price adjustment will undoubtedly be passed on to the consumer,” he says.

Fleming believes there are no "apparent shortages” of materials or production facilities that could negatively affect domestic demand. Pricing spikes, however, are difficult, if nearly impossible to predict. In cost-push inflationary times like this one, he advises that contractors take a close look at how to best manage their costs.

About the Author
Don Procter is a free-lance writer in Ontario, Canada.