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A tale of two parts: Expectations turn higher for Canadian construction, but planning and regulation potentially dampening residential new starts in the GTA


Activity and workloads in the construction sector continued to increase during the final part of last year, with confidence remaining strong for 2014, says the latest RICS Canadian Construction Market Survey.

The infrastructure sector recorded the strongest momentum with a net balance* of 50 per cent more respondents seeing activity increase rather than decrease. However, the growth in activity appears reasonably broad based, with only the public housing sector experiencing a decline in workloads over the quarter.

At the 12 month time horizon, expectations for workloads and employment remain upbeat, reflecting the improved net balances* in Q4 of 84 per cent and 58 per cent respectively.  This is reflected in respondents’ expectations in actual percentage terms, with workloads and employment now predicted to grow by around 4.7 per cent and 2.5 per cent over the coming year; up from projections of 3.4 per cent and 1.1 per cent in Q3.

Moreover, a net balance* of 40 per cent of respondents expect the infrastructure pipeline managed by Infrastructure Ontario to increase over the year, supporting growth and expansions in the construction sector.

Tender prices are expected to increase across each of the four broad regional blocks that we monitor but the impetus behind price rises is variable across regions.  While a large majority of respondents expect tender prices in the Prairies to increase, there seems far less upward pressure on prices in Ontario.

The Prairies are also expected to experience the strongest investment in construction over the coming few years.

Throughout 2013 planning and regulatory delays were reported as significant constraints on construction activity, but in the final quarter, unsurprisingly, there was a sharp increase in the proportion of respondents for whom adverse weather conditions were an impairment on activity.  In terms of skills shortages, the main area of concern is quantity surveyors, with two-thirds of respondents having difficulty sourcing these skills compared to about half of respondents reporting shortages in Q3.

“The development charge increase coupled with the short phase-in period has been one of the largest dampeners on residential construction in the GTA,” said Charlie Ross FRICS, Partner at CB Ross. “For a one bedroom apartment in the GTA the development charge was $8,356 in November 2013. This increases in Feb ‘14, Aug ‘14, Feb ‘15, Aug ‘15 and Feb ‘16 at which point the charge is $14,749 – a 75 per cent increase in 27 months.”

“Today’s condominium projects take many years to develop. Developers who have already purchased lands without having these increases in their budgets will attempt to pass these costs onto the purchasers, either through a direct price increase or via an additional reimbursable – neither has been accepted by the marketplace and sales have slowed.

“Contributing to a slowdown in residential construction starts has been the tightening of the lenders’ credit policy in terms of higher expected profit levels, stricter definitions of a presale and more due diligence of creditworthiness even before discussion papers are issued.

“The result is that just as sales are becoming more difficult to achieve, lenders are accepting less as bona fide presales and profit levels are being reduced. These three factors provide the basis for a potential slowdown in new residential starts.”

 

*The headline net balance for total construction workloads is an unweighted average of all of the sectors (in net balance terms) covered in the survey.




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