Lumber market, before and after 2020.
Aug 20, 2021
This year's home renos are left with no choice but to pay for the cost of unstable lumber prices within the past two years.
Performance Review: Lumber Industry from 2019 - 2020
⅓ of the world’s boreal forest is accounted for by Canada, making it the world’s largest exporter of soft lumber before Russia surpassed its record in 2019. The fall in the industry’s performance is accounted for by the slow down of activity in the US housing market and the meager demand for NA lumber overseas in the same year. Considering that the US is one of the country’s major trading partners in the industry mentioned, the biggest lumber-based companies in BC were greatly affected. Lumber production in the area fell by 19%, and Canada’s lumber exports from Jan to Sept. 2019 decreased by 5% y-o-y. Fast forward to the first half of 2020, a boom in the US housing market was seen. Since activities in the housing market are highly correlated with the lumber industry, this could mean higher demand for the latter. Take a look at Figure 1 to see the rise in the lumber market from Dec 2019 to March 2020. Please click the photo to see it in full view.
Production of lumber saw an upward trend from Dec 2019 to March of the following year, which increased production by 26%. However, when the pandemic hit North America in the same month, the anticipated growth for this industry was not attained as sales tumbled significantly. The production also went down from 5,009.2 cubic meters in March down to 3,496 cubic meters in April due to covid restrictions imposed to stop the disease transmission. The supposedly good start unexpectedly hit rock bottom levels that were even worse from the preceding year. In fact, CFI revealed that the impact was even worse during the first nine months of the year, where shipments were 10% lower than in the same period in 2019. Meanwhile, Q3 revealed a different scenario --demand in the lumber market spiked once more due to the ongoing home projects in the US that initially took place before the pandemic started, aside from the unprecedented domestic home sales in the last two months of 2020. The December report by Statistics Canada revealed that the lumber industry reported a record-breaking 8.3%($3.7B) increase in sales of wood products which contributed significantly to a 0.9% rise in the country’s manufacturing industry. The trend may sound good to the lumber operators in the US and Canada, but since they did not anticipate such a trend, supply chain problems arose, which led to skyrocketing prices of lumber in the same year. According to Madison’s report, prices of lumber increased significantly in 2020 compared to the rise of its prices in the previous years, which is clearly presented by the chart below. Please click the photo to see it in full view.
Current Market Conditions
The increasing behavior of lumber prices continues in 2021. The June 2021 report by the New York Times revealed that lumber futures rose to a never-before-seen hike which peaked at more than $1,600 per thousand board feet in early May. This, however, tumbled eventually as demand for lumber of the do-it-yourself sector and the professional home building industry slowed down due to the rise in the price of lumber. At the same time, mills started to regain their normal level of production as restrictions ease down.
Just like what happened in the US, lumber prices have reached unprecedented levels in Canada. According to Ian Dunn, president of Ontario Forest Industries Association (OFIA), the cost of lumber has risen by roughly 170% since November of last year. Based on Natural Resources Canada, two-by-four Eastern spruce-pine-fir were sold at $1,400 per thousand board feet in March, while another type of lumber with the same measurement, Western spruce-pine-fir, is sold at $1,200. The rise is mostly attributed to sawmill closures that started at the beginning and increased the demand for house renovations by around 40% in October, based on a real estate survey conducted by TD Bank. On top of this, since more consumers are becoming environment-conscious, demand for sustainable and energy-efficient products like wood was greatly impacted, according to Dunn.
The cost of lumber to home construction in 2021
In Canada, this rise in the level of lumber prices contributed greatly to the rise in the cost of home renos, general contracting services, and consequently to the prices of houses. In March 2021, CHBA conducted a survey regarding the impact of lumber prices on construction costs, where they found out that the spike in the prices of lumber costs them an additional $10-20k, as indicated by almost 1/3 of their respondents. The survey also revealed how this issue on lumber prices resulted in delays in home completion. Respondents in Ontario reported the highest average delay, which is equivalent to seven weeks. While the survey found out that lumber isn't the only supply chain issue faced, the instability in lumber prices and related products is a major concern because it impacts the construction cost and home completions and causes delays in builders' pre-sales/or development. According to Halim, the economist in CHBA, "if the price of lumber goes up between the time of sale and the time of construction, builders will have to pay the difference."
See the table below to better understand how lumber prices impacted the costs of housing construction in the country.
A month after, the increase in the price of lumber added about $30,000 in additional costs to renovate a 2,500 square foot home, according to Dunn. In connection to this, Paul Jannke with Forest Economic Advisors (FEA) said that those who are going to build a deck this summer you will be paying three times more for your lumber than they would have two years ago. FEA also expects lumber prices to remain high throughout the summer until fall, and for Chris Black, co-owner of Century Mill Lumber in Stouffville, the rise in prices is here to stay.
Things slightly improved fast forward to June. Based on the mid-summer 2021 update on softwood lumber prices and its market by Madison, lumber prices started to fall for two consecutive weeks. Price quotes became more reasonable, and sales volumes are getting back into shape. This, however, may still change, and price stability in the lumber market is unknown until the weather turns winter-like and construction takes some break this year.
Meanwhile, based on the updated analysis reported by Western Retail Lumber Association (WRLA), the price of lumber only accounts for about 4% of the total cost of building a new home. The heavier weight accounts for labor (50%), followed by HVAC, mechanical, and plumbing (22%). Considering this, we can conclude that lumber prices have little impact on the cost of house construction, but that doesn’t mean that we were spared from incurring higher costs.
For the past two years, the lumber market experienced its fair share of difficulty, which impacted the construction industry and the homeowners accordingly. Based on statements made by the experts mentioned previously, this impact may last for some time and, worse, may remain unrecovered. With this in mind, homeowners looking forward to renovating this year should keep track of the behavior of lumber prices and reconsider their budget to prevent unnecessary disruption in getting their new homes done or renovated.
Such may sound frustrating, especially if you don’t have a contract with the right home builder to efficiently use your resources to save money and time. Free yourself from such frustrations, hire the right contractor.
This article was last updated on Jul 7, 2022