How is Canada's construction outlook shaping up?

There's plenty of optimism ahead – but equal food for thought

How is Canada's construction outlook shaping up?

The housing and mortgage markets may have been cooling in recent months, but residential construction appears to have been motoring along at a healthy clip in the first half of the year.

April saw a national increase of 3.2% in residential building investment, according to Statistics Canada, with non-residential construction investment up 1.4% and overall building construction rising by 2.7% to over $20 billion.

That rosy outlook marked the seventh successive month that residential construction had posted an increase, the national statistics agency said, as seven provinces saw investment increase. In total, $15.7 billion had been pumped into the residential space by April.

David Clarke (pictured top), owner of Clarke Mortgage Group TMG and a broker who’s well versed in construction financing, told Canadian Mortgage Professional that he had noticed an uptick in discussions about new builds in his home base of Nova Scotia in recent months.

“I’m talking to a lot of people about construction,” he said. “I think it’s pretty 50-50 [between] self-build people and helping developers and contractors do it. There seems to be more new construction, which wasn’t the case when COVID happened and wood prices out here shot up.”

That’s perhaps because of a chronic lack of housing inventory out east, he suggested, meaning that construction on a new build is a sound investment for the future. “There are no places to buy here,” he noted, “so it’s a pretty safe bet to build that someone’s going to be interested in it.”

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On the commercial side, Clarke said high-rise buildings are becoming increasingly prevalent, particularly with properties in Halifax being purchased and torn down to make way for new apartment buildings.

Commercial investment had grown to $2.9 billion in April, according to StatCan, an increase of 1.5% over the previous month. That contributed to overall investment in non-residential construction inching upwards by 1.4%.

Despite that sunny outlook for both residential and non-residential construction in the opening months of the year, pause for thought may arrive with the rising-rate environment – and continuing uncertainty over costs of lumber and other building materials.

North America is still expected to post growth of 2.4% in its construction output in 2022, according to new data from GlobalData. Still, that marks a milder performance than anticipated, with both rate hikes and material prices seemingly weighing down on industry sentiment.

Both the US Federal Reserve and the Bank of Canada have embarked on a program of rate hikes throughout 2022 to date, with further increases expected before the end of the year.

That said, Canada could be set to fare better than the United States where construction is concerned. GlobalData noted that the US has “suffered the effects of the poor macroeconomic environment far more than Canada” and said the latter will see overall construction growth of 4% this year.

In 2021, one of the most sizeable barriers to construction was the price of lumber, which spiked to $1,700 USD per thousand board feet in May of that year amid supply chain disruptions, pandemic shutdowns and widespread shortages.

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Those challenges have largely eased, with that bubble puncturing as dramatically as it swelled in 2021 – and the cost of lumber now sits at about $630, a far cry from the eyewatering prices witnessed last year.

Developers in one of Canada’s strongest construction markets, Toronto, are set to face further headaches in the near future with development charge hikes of almost 50% on the way.

That’s despite Toronto developers already paying substantially higher construction fees to government than other cities, according to Canada Mortgage and Housing Corporation (CMHC): $86 in Toronto, compared with $24 in Montreal and $70 in Vancouver.

Nevertheless, the North American construction outlook for 2023 is a positive one, according to GlobalData. While the spectre of inflation and ongoing supply chain snarls may be currently hindering overall growth, the company’s construction analyst Jack Riddleston said those issues were likely to begin subsiding by next year.

“The outlook for North America will improve, as inflationary pressures and supply-chain disruptions will likely subside and federal spending from the IIJA [the US’s Infrastructure Investment and Jobs Act] will likely be realized in late 2022 and early 2023,” he said.

“As a result, GlobalData expects the North American construction sector to grow by 3.7% in 2023.”