Volatile Economy Continues To Rock Construction Pricing

Volatile fuel prices in mid-2008 drove up reconstruction costs in Canada and the long-term impacts are still being felt.

Gas prices in Canada peaked at $1.47 toward the end of June 2008 and by year’s end dropped to prices not seen since November 2006. While a number of economic factors were at play throughout 2008, this drastic spike had a direct impact on the price of construction materials — especially those with a petroleum base.

Cost information from more than 17.9 million repair estimates for buildings in the U.S. and Canada that totaled over $111.1 billion in losses was gleaned by mid-year. Over 14,000 unit costs in 37 economic markets in Canada are monitored each month as part of the research process.

25-Year Composition Shingle Annual Change

Rising fuel costs in 2008 had the greatest impact on petroleum-based building materials. A good example of this impact is found in the cost of 25- year composition shingles. In 2007, the average cost of 25-year composition shingles in Canada decreased by nearly 12 per cent. However, 2007 installed costs for shingles rose very slightly (by .2 per cent), primarily because the lower cost of shingles was offset by increased costs for labour.

This pattern was reversed in 2008. As fuel costs spiked in mid-year, the yearly average for 25-year composition shingle costs skyrocketed by almost 58 per cent. Installed costs for composition shingles including labour and other materials such as nails and flashing rose by around 26 per cent. The lower installed cost was due to stable costs for labour and other materials.

Carpet Composite and Cost Index

Most popular styles of carpet use petroleum-based fibers. The mid-2008 spike in fuel prices had a significant impact on carpet prices, but carpet manufacturers were slower to pass along cost increases than were composition shingle manufacturers. Increased petroleum prices typically have a more immediate impact on composition shingle manufacturing.

A composite of average-and high-grade carpet prices reported was still down in the second and third quarter of 2008 even as fuel costs hit their peak. The impact of higher fuel prices began to affect carpet prices in the fourth quarter with a spike in costs that continued into 2009.

Lumber Composite Index

Although costs for petroleum-based products are the most dramatically affected by spikes in fuel costs, prices for all construction materials are affected, primarily because of increased production and distribution costs. In mid- 2008, rising fuel costs stopped a steady decline in lumber prices that started in the last quarter of 2006. The average price for the Canadian Lumber Composite Index rose by 9 per cent in the third quarter of 2008 and by another two per cent in the fourth quarter.

The composite is based on prices acquired from more than 1,000 suppliers across Canada for a variety of highly used dimensional and panel lumber products.

Drywall Material Index

Drywall prices fell off a cliff between the first and third quarters of 2007. Before this dramatic plunge drywall

prices had been highly volatile over the past five years. These years included high demand from the record-breaking U.S. storm seasons of 2004 and 2005 and a booming worldwide economy that had an impact on drywall costs in Canada. Drywall plants were often running at capacity and reports of drywall shortages were common. Once drywall prices collapsed, they were little moved by the upsurge in fuel costs in 2008, even though drywall is heavy and relatively expensive to ship. It is likely the increase in fuel costs kept drywall costs from dropping even more. The result was fairly consistent drywall pricing throughout 2008.

The drywall material index is based on various quantities of the drywall materials included in a typical installation including drywall boards, tape, joint compound, and so forth.

2008 Year-End Median Cost to Rebuild

The overall reconstruction cost relationships between Canadian provinces can be seen in data from the Year-End Median Costs to Rebuild. The overall cost to rebuild typical homes ranging in quality from economy construction to premium construction is tracked. This includes the labour, material, and equipment needed to rebuild the home using pricing information from cost research. A look at home types at both ends of the scale — economy and premium quality — shows how costs varied across Canada in 2008

The national average for economy grade homes was $97.26 per square foot and the national average for premium grade homes was $451.81 per square foot. In 2008, Alberta led the country in the cost to rebuild a premium quality home and New Brunswick led in the cost to rebuild an economy grade home.

Lessons from 2008

A key lesson from 2008 is that market volatility makes it difficult to predict changes in the property insurance industry. For some, a struggling economy would seem to indicate lower reconstruction prices across the board in 2008, but higher fuel costs sent many construction costs soaring and kept others from falling. Once fuel prices dropped, most material prices failed to drop with them. By the end of 2008 fuel prices were as low as they had been since late 2006, but many material prices remained relatively high.

The 2008 economy showed that many former trends and assumptions no longer apply in the current turbulent market. Access to up-to-date information and current cost trends is increasingly important for risk managers and claims mangers looking to make informed decisions in an unforgiving economy.

Joel Dagenais is president of AXP Software, which is Xactware’s exclusive Canadian representative.