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Why soaring lumber prices mean higher costs for renovators and homebuyers

·4 min read
New residential construction home framing home against a blue sky
Residential construction home framing with lumber (Getty)

Anyone planning to build a deck or fence to complete their backyard oasis this summer will likely be in for higher wood costs and supply shortages, as well as higher home prices.

Lumber prices have soared since the COVID-19 pandemic began, with supply unable to keep up with demand from home builders and renovators.

The price per thousand board feet touched an all-time high of $1,040 in March. Joel Neuheimer, VP responsible for trade at Forest Products Association of Canada (FPAC), says the current price situation is crazy.

“That's more than three times the 20-year average, so that shows you how unusual this is,” he told Yahoo Finance Canada.

The industry ramped down production and shut down mills when the pandemic first hit, expecting reduced demand in the face of record unemployment and an economy in tatters. But that turned out to be the wrong bet, and a thirst for housing kept construction rolling, while working from home led to more home improvement projects.

Prices shot up and there were shortages. A year later production is still stuck playing a losing game of catchup. Neuheimer says a key reason is that there’s only so much wood that can be cut.

In each of the provinces, there's an annual allowable cut to be respected.

“If you take B.C. for example, they've been even further constrained with their annual allowable cut, when you think of all the timber that they've lost in the last several years to extreme forest fires and all the wood that was killed by the pine beetle.”

Neuheimer says adhering to health measures is also preventing more lumber from coming to market.

When lumber prices will return to normal

Paul Jannke, principal of Forest Economic Advisors, says supply will struggle to keep up with demand from homebuilders, so prices will remain historically elevated for the rest of the year.

Jannke says that that doesn’t mean prices won’t fall from their current levels. Lumber is volatile over the course of a year.

“There are periods of seasonal buying that drive prices up and periods when dealers go quiet because demand is seasonally weak and/or prices are high enough that they don’t want to (or can not because of credit constraints—high prices tap out credit lines with lower volumes than low prices) take the risk of purchasing wood,” he told Yahoo Finance Canada.

“We are nearing a time (April-May) when dealers typically cut back on their buying to digest their Q1 purchases. With prices at record levels, dealers will pull back in April/May.”

Jannke says lumber’s been harvested, production has been ramped up, and mills want to get it to market as fast as they can to take advantage of higher prices. Along with warmer weather that allows longer trains to ship it, he says lumber prices will drop from current highs.

“Still, inventoryies are at record lows (for this time of year), so prices won’t drop back to more 'normal' (meaning $350-$400/MBF) levels,” said Jaanke

“Part of what will drive prices down will be a lack of buying as dealers tapped into their inventory (thus drawing it down) to meet still strong demand. Once prices drop 30-40% (meaning to $600-700/MBF), dealers will perceive an opportunity to buy at a 'good price level'. So we expect prices will bounce back up in Q321.”

Added costs for builders mean higher prices for home buyers

Lumber is among the principle materials used to build homes, so higher prices are leading to increased costs for builders.

“Members report that the direct cost of lumber and wood components in a house has increased by as much as $30,000 for a 2200 sq.ft., 2-story with basement, 3 bedroom, 2.5 bath home. Other materials have also been subject to significant increases, as well as transportation and delivery costs,” Ron Rapp, CEO of the Homebuilders Association Vancouver, told Yahoo Finance Canada.

Rapp says the builders are working hard to meet their obligations, but the higher costs must be passed on to buyers.

Kevin Lee, CEO of the Canadian Home Builders’ Association, says delays due to a lack of supply are also costly and leading to uncertainty.

“We have had builders limiting pre-sales and pulling building lots off the market since they can’t effectively price the finished product because of price volatility, nor can they be sure about construction timelines,” Lee told Yahoo Finance Canada.

“For example, one leading builder-developer in Ontario has stopped pre-sale of new homes until they can more confidently price construction, after having previously had to raise the cost of their new single-family homes by an average of $30,000 and townhomes by $7,500 in response to higher and uncertain input costs this past summer.”

Lee says while Canadian mills are operating near capacity, U.S. mills are lagging and a ramp-up could help alleviate the shortage.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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