Housing Industry Feeling The Heat

In yesterday’s blog, we mentioned that incomes for Canadian workers seem to be steadily increasing. In fact, over the past seven months there has been a notable spike in earnings when compared to statistics from the same time a year ago. Thankfully, Canada seems to be continuing its trend of leading the world in recession recovery.

However, not all is rosy in the Canadian workforce. In an article from yesterday’s edition of The Toronto Star, business reporter Tony Wong reminds us that there are still some struggles being fought by certain sectors. The residential construction industry, Wong writes, is expecting lower profits this year.

The demand for new housing remains slow. Healthy revenue growth in this industry is not expected until the middle of 2011, he notes. According to a report by the Conference Board of Canada, “a drop in housing starts in the second half of the year is expected to translate into a decline in overall profitability for the industry.”

According to Michael Burt, the board’s associate director responsible for the industrial and economic trends group: “While building activity may have picked up earlier this year, material and labour costs have risen, meaning that profits are down. Competition among producers will also help to keep pricing down.”

Burt believes that it will take quite some time before profitability become present once again in the residential construction industry. It peaked at $5 billion in 2008. These were record numbers. He goes on to mention that price appreciation will play a big role in the industry’s revenue growth over the next few years.

However, “this will largely be the result of the industry attempting to pass increases in material and labour costs through to customers,” says Burt, “Although revenue has surged over the last several years, so have costs…High costs for wood products had a negative effect on profitability in the first quarter of the year.”

Writes Wong: “Labour and material costs will continue to be the major sources of cost growth in the coming years, says the board. Employment, for example has risen by nearly 100,000 jobs since bottoming out in the spring of 2009. Material costs have also gone up significantly, with prices for lumber in particular surging at the beginning of 2010.”

Adds Burt, renovations will be a key driver over the next few years. This will come as a result of a high number of resale homes being sold in addition to aging housing stock. Expenditures for renovating, then, will be in high demand. Renovations are usually primary expenses when a home is first purchased.