What’s contributing to rising reconstruction costs in Canada?

Supply shortages and the skyrocketing price of lumber have combined with project delays and the continued effects of the pandemic to raise property reconstruction costs in Canada, according to the latest reconstruction cost update from Opta Information Intelligence.

Opta’s recent analysis for the second quarter of 2021 reveals that property reconstruction costs increased by 6.4% across Canada year-over-year between May 2020 and May 2021. One major contributing factor was lumber supplies and costs that “continue to break records and budgets,” the property data and valuations company said in its Reconstruction Cost Updates report for Q2 2021, released June 1.

Year-over-year, lumber prices have risen 120-140%, with a further increase of up to 35% expected this year. Overall price increases are approaching 400% over 2019.

“Lumber, in particular, has been at the forefront of everybody’s mind,” Greg McCutcheon, Opta’s president, said in an interview with Canadian Underwriter in advance of the release of the report. “We expect that these inflationary costs — not just on lumber, but other materials — will continue to be with us for the remainder of this year.”

And while it’s too early to predict what will happen in 2022, McCutcheon said he believes there is going to be a tail on these costs. “Major rebuilders have weathered the uncertainty with lower price volatility than smaller operators, but all have experienced a general upturn in [year-over-year] costs,” the report added. “At this time, there is no clarity on when this situation will end, and most operators have resigned themselves to another year of supply issues.”

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The skyrocketing cost of lumber has even attracted the attention of police across the country. The Canadian Press reported last month that builders have been warned about the rising number of lumber thefts.

Saskatoon police have reported a “huge jump” in thefts at construction sites since 2018, mostly late at night on weekends. Some construction sites have been hit three or four times; one site lost $2,700 worth of lumber in one night.

In Guelph, Ont., a man rammed through the gates of a Home Hardware store at 4 a.m. on April 12 and stole $10,000 worth of lumber.

And in Grand Falls-Windsor, N.L., about $1,500 worth of lumber was recently reported missing.

McCutcheon said supply-and-demand is contributing to the increase in reconstruction costs. And more people are staying at home due to the pandemic, so more are renovating their homes. In fact, nearly one in every 20 homes inspected by Opta Precise Services have significant renovations underway and include a Course of Construction (COC) supplement.

Another contributing factor is the desire of some people to move out of major city centres such as Toronto to smaller, suburban areas.

“So, for example, there’s been a lot of new construction going on in Oshawa [Ontario] and other areas that are smaller, where’s there’s a demand of houses for people wanting to move out of the main city centres and get into new homes,” McCutcheon said. “If you look at the real estate markets that are the hottest, those are also areas where material costs are driving higher prices.”

Reconstruction cost increases were more evident in the western provinces, as is usually the case, but Newfoundland and Labrador and Nova Scotia showed more pronounced increases than usual in the most recent quarter. “It’s not just the lumber costs, but the costs of kitchens, bathrooms and basements are all up,” McCutcheon said.

The insurance industry needs to understand what these renovations do to the insurance value of the home, McCutcheon said. “I think it’s very important for everybody to remember that $100,000 of a home repair doesn’t mean the value is up by $100,000. We’re hearing, anecdotally, stories from brokers who are having customers call them and say, ‘Well, I put in a $100,000 renovation, what does that do to the value of my home?’”

Industry professionals should work with a property assessment firm to determine how these repairs affect total home value, McCutcheon said.

Feature image via iStock.com/Lisa5201