Why you are paying more for a new house

Prices of newly-built detached houses in Canada have stayed remarkably stable over the past decade. Knock off the price of land, which relates largely to location, and the typical new 1,800 square foot Canadian house sells for an average of $162,000, or about the same as in 1991.

This is rapidly changing. You will be paying substantially more for a new house in virtually every Canadian city over the next year, and demanding buyers are part of the reason.

Statistics Canada’s New Housing Price Index, an index of contractors' selling prices, rose 2.6 percent this spring compared with the first quarter of 2000. This was the highest annual increase since May 1990, when the index advanced 3.8 percent.

A summer 2001 survey of members of the Canadian Home Builders’ Association, who represent eight out of every ten new house starts in the country, shows that nearly 70 per cent expect their costs will increase over the next 12 months. And, builders say, all of the increases will be passed onto consumers.

The price increase reflect a convergence of rising building material prices, a shortage of tradespeople from carpenters and masons to semi-skilled labourers, increased government costs on serviced building lots - and higher expectations from new home buyers.

One of the key culprits is building materials. The price parade is led by lumber, but includes insulation, drywall and other products used in virtually all new houses.

The second big cost is labour. A shortfall of tradespeople is already acute in busy Ontario and Alberta and is now being seen right across the country. Rapid training programs have been launched in various centres but many of the best and brightest young graduates quickly move through residential work into higher paying commercial construction.

Government costs, particularly development cost charges or lot levies, new environmental regulations and higher taxes at the municipal, provincial and federal level are also adding to new house sticker shock.

An Ontario study estimates that the typical new house includes more than $22,000 in direct government costs. In some provinces, such as British Columbia, it is as much as $10,000 higher. Tougher legislation restricting construction on potential farm land, close to streams and on soil suspected of being contaminated, such as former industrial property, has restricted access to potential residential land in nearly all major Canadian cities.

Taxes on new homes includes the federal Goods and Service Tax (GST) which is levied nationally only on new homes, not resale properties. In most provinces, there is also a provincial sales tax added to the cost of the completed house, plus municipal levies on development of each building lot.

Builders and consumer groups have argued, unsuccessfully, that the Goods and Service Tax should not be levied on land, since it is neither a manufactured product or a service and represents a huge tax hit for the urban new house buyer. In Toronto or Vancouver, for instance, the land value of a 50-foot building lot can be worth the price of the house built on it.

Yet the final, and some say the main reason for higher new house prices is more demanding consumers. New homebuyers today want "all the bells and whistles," builders say, which ratchets up the competition and costs for builders.

Even with razor-thin margins, builders are forced to meet consumer demand. When asked to list the changes they will make in their new houses next year, the biggest response from builders was for improved energy efficiency and "more luxurious features."

By: Frank O'Brien
October 11, 2001

Copyright 2001 Inman News Features
Distributed by Inman News Features