Soaring Lumber Prices In Canada: Causes, Effects, And The Outlook

  Lumber prices in Canada have risen more than 170 percent in the last six months. With the soaring demand for new houses and the growing numbers of homeowners planning remodels, fencing, and other home improvement projects, prices are not expected to settle back to pre-pandemic levels anytime soon.   It’s not just the price of lumber that can’t stop rising. Other wood products are getting more expensive with every passing week. What’s also remarkable is that buyers don’t seem too concerned with the record-breaking price hikes because mills are struggling to fill orders.   Rising Lumber Prices Driving Building and Renovation Costs Up     All the price hikes have made it more expensive to build and renovate houses. The runaway prices may also be indirectly spurring demand for new housing units in a market where demand was already outstripping supply.    Because the ever-rising prices are making it difficult to cost projects and price new housing units, many developers have chosen to develop and sell in blocks. That means even fewer units are making it to market, which pushes demand even more.   At some point, builders will have to pass on the cost of all these price hikes to the consumers. That will mean higher home prices. In fact, that’s already happened. Builders say the high lumber prices have added between $8,000 and $10,000 to the cost of building a single-family home in Canada.   About that board-on-board wooden fence, deck, or pergola you had planned for this year’s building season, the sky-rocketing prices mean you have to revise your budget upwards. Hopefully, that won’t kill the project. But what has caused the crazy price situation in the building materials market? What Is Causing Lumber Prices to Soar?   The simpler explanation for the stunning rise in lumber prices is that supply can’t keep up with demand. But with prices as wild as they are, the question demands further investigation. Let’s consider some possible causes: Low-interest Rates   In its efforts to help the economy recover from the ravaging effects of the Covid-19 pandemic, the Bank of Canada has maintained a low 0.25% benchmark interest rate. As the red hot housing market has shown, that wasn’t the right bet.   The pandemic did not discourage people from investing in new homes nor from improving their existing ones. Many were more than prepared to dip into their savings in spite of the economic uncertainty caused by the pandemic.   In the housing market, the low-interest regime has, in fact, worked too well. So well that the bank has now flagged the urban markets of Toronto, Hamilton, and Montreal for what it has called ‘exuberance’ in their housing markets.   The low-interest rates have spurred unprecedented borrowing in the housing market, which has seen house prices rising sharply. Still, demand for new homes has not slowed.    People are, in fact, taking on more debt to buy the ever more expensive houses. According to the Bank of Canada, this is debt that most of the borrowers can’t afford. The central bank is so concerned that it has warned that interest rates will not stay low forever. For now, though, interest rates and borrowing costs will remain low and the demand for lumber and its prices will stay high.   We have blamed so much on Covid-19 that it’s become a reflex action. So why not shift blame for the rising prices of lumber onto the pandemic? Unfortunately the pandemic has to take the rap again, in more ways than one:   The Work From Home Craze Has Spurred Demand For More Spacious Homes       The stay-at-home orders the government resorted to as a way of containing spiraling Covid-19 virus infections in the first quarter of 2020 forced many people to work from home.    Suddenly homes that had been adequate as living quarters no longer cut it as places of work. Many either had to renovate and make their homes more work-friendly or upgrade to newer, more spacious homes.   Working from home proved so successful that many people made up their minds to not go back to working from the corporate office again. Many of the big tech companies have since announced they will allow some of their staff to continue working from home post-pandemic. All the more reason to make the home more comfortable, which means more home renovations and greater demand for lumber and other building materials. Covid-enforced Mill Closures       The surge in demand for lumber would not have led to such a steep rise in prices if the supply side hadn’t run into challenges. At the beginning of the Covid lockdowns, lumber mills effectively shut down. The construction industry as a whole ground to a halt because of that and other Covid-related reasons.   When the economy opened again, many mills didn’t immediately ramp up production, worried that rising unemployment would sap demand. It didn’t and from then on the industry has been playing catch-up.   Demand for construction materials and lumber, in particular, didn’t suffer as feared. Soon it was outstripping supply. With not enough product to meet demand, prices were always going to rise. While most mills are now operating at full capacity, demand is still outpacing supply.    It is not like mills can cut more trees to feed the excess demand. Annual allowable cut rules mean there is only so much wood mills can process and bring to market in a given year. So there is not going to be a major improvement in supply this year, even as lumber mills and dealers are eager to make the most of the prevailing high prices.    Will Lumber Prices Come Down In 2021?   The current outlook is that the only way lumber prices will be going this year is up. The current warmer weather means there will be more lumber making its way to dealers. That will help contain demand. But in all likelihood, it