Home builders feeling pinch

Rising labour and material costs as well as a continued cooling in the housing sector will rip into profits of Canadian home builders for a second consecutive year, according to a report released yesterday by the Conference Board of Canada.

As demand for new-home construction weakens, profits this year are expected to dip by three per cent compared with a year ago to $3.6 billion. This follows a 16.4-per-cent year-over-year plunge in 2007.

The Conference Board report said profits will drop another 6.6 per cent to $3.3 billion in 2009 before swinging upward in 2010 through to 2012. Its forecast says year-over-year increases in 2010 to 2012 will be 6.7 per cent, 4.1 per cent and 2.3 per cent, respectively, and peak at $3.8 billion at the end of the forecast cycle.

"Costs escalating at frenzied paces ripped a strip off profits last year," said the report

"It was the first time in recent years that cost growth outpaced revenue growth. Despite a much slower pace of cost growth, industry profits will fall again this year and in 2009 as slowing construction activity and input-price appreciation take their toll on the industry."

Profits for the home-building industry peaked at $4.4 billion at the height of the housing boom in 2006.

The slower pace of economic growth throughout the country "will push Canadian housing markets into an overdue correction. The industry has been building above the rate that demographics and economic growth can support, and now the time has come for a reduction in building activity," said the report, adding the sales-to-new-listings ratio has been on a downward trend, putting the market into a more balanced state.

Because of that, home-price appreciation has been steadily decelerating with new-home prices rising 4.2 per cent in May on a year-over-year basis, their weakest pace since 2002.

"High costs will continue to plague the industry," added the report. "Labour is scarce and expensive, and although lumber prices remain weak, other materials [such as steel and concrete] are expensive and costly to transport.

"When combined with weakening demand and price appreciation, the result will be a drop in profits this year and next. Profits will begin to recover in the outlying years of the forecast but stay below their 2006 peak."

The report said the industry's costs jumped by 10 per cent in 2007 to $100.3 billion and will increase a further 1.4 per cent this year.

Meanwhile revenues in 2007 were up 8.8 per cent from the year before to $104 billion and expect only a 1.3-per-cent increase this year to $105.3 billion. "This slowdown is an overdue correction in the market, after housing supply outstripped demand for several years," said Michael Burt, associate director, industrial outlook. "We are now moving into a buyer's market, as home construction and sales activity return to a more normal pace."

(prepared by Mario Toneguzzi/Vancouver Province)