In 2012, 2015 & 2017 the Regina and Region Home Builders’ Association (RRHBA) partnered with the University of Regina’s Centre for Management Development (CMD) to construct an unbiased, third-party analysis of residential construction cost drivers and the local housing market.
The primary objectives of the project were to:
- Identify the trends in land development and housing construction costs, building on the data collected in previous years by the CMD and RRHBA with strong emphasis on collecting detailed cost elements;
- Examine the effects of government policy on the industry; and
- Analyze Regina’s broader market and demographic trends over time, comparing local data with that of aggregate Canada and neighbouring cities.
The reports covered a range of topics, including land development, housing construction, government policy, and market trends. Through the process of structured interviews and data collection, primary and secondary sources were studied and analyzed to present a cross-sectional representation of residential construction cost components, drivers, and market trends.
At the time of the 2017 study, Regina’s population growth rate of 2.6% in 2016 more than doubling the national rate of 0.9%. Planners, regulators, developers, and builders all must work together to accommodate the growing population. This continued demand, along with several other factors, resulted in a sharp increase in the price of new homes of 57.3% in just ten years, drastically exceeding the national average of 15.9%. Yet, a significant portion of the increase occurred between 2007 and 2012, and Regina entered a more stabilization of prices environment from 2012 onward. At the same time, Regina saw an 18% increase in median family income since 2008 – the third highest increase out of all major Canadian cities, which was a contributing factor to rising home prices. The data shows that Regina has a current price-to-income ratio of 3.2, which is comfortably below the national average of 6.0.
While previous studies showed a continued upward trend in construction costs across all categories, the data collected for the 2017 report indicates that some cost categories have decreased for the first time in nearly a decade. Builders attributed the reduced costs in some categories to the reduced cost of labour resulting from oversupply, offsetting some of the increased material costs. Overall, though, construction costs (excluding the price of the lot) have increased since 2014 by 16.8% for two-storey homes and 24.9% for bungalows but decreased by 22.9% for condominiums.
The study also examined the impact of government policy on land development, housing construction, and the housing market. It was discovered that the recent change in Service Agreement Fees has been priced into the cost of a lot, with developers maintaining similar profit margins, passing that increased cost on to the builders, who then ultimately pass that on to the homebuyer. At the time of the study, Provincial Sales Tax (PST) changes had not yet been implement, but builders and developers discussed how it will affect the market, sharing calculations and predictions. Now that the PST changes have been implement, it is clear the significant additional costs to a newly built home, while removing potential new home buyers out of the market.
The research for this report serves not only as a benchmark with which builders and developers can compare their own data, but also improves industry transparency for planners, regulators, service providers, and the public. The report ultimately builds on data from previous reports with more recent and therefore relevant statistical information available.
Highlights from the Report
The Cost of Land Development
When it comes to land development, more goes into it than meets the eye, and each factor plays a vital role in determining the final sale price of an individual lot. Developers typically analyze a new subdivision in terms of the entire project, including the infrastructure, landscaping, major and arterial roads, and other necessities. The cost and eventual profitability of land development can vary greatly from one subdivision to the next due to numerous major factors. First, the price of the raw land itself. Some developers in Regina have held land for several decades, purchasing it for significantly less than its market value today. Of course, this strategy is somewhat speculative as the direction of urban growth can be difficult to predict and holding the land for a long period of time came with expensive financing and opportunity costs. The second factor is existing infrastructure. While some new subdivisions can build on existing infrastructure – major roadways, water mains, etc. – others may require major infrastructure investment to ensure functional services, such as a sanitary lift station, which adds millions to the construction cost. One of the major challenges in land development being that the development is typically in the red until the last 10% of lots are sold, meaning there can be significant risk and calculated speculation involved in land development. That risk is usually compensated through higher return than if the capital was invested in a less risky and shorter time horizon investment.
Although Regina’s community plan has placed a greater emphasis on infill development. The growth of our community in the Official Community Plan (OCP) is at 30% Infill and 70% Greenfield. The development of residential housing within existing communities with a focus on increasing densification – most of the new residential development is continuing to come from greenfield development – expanding the city’s boundaries. It is important to note that new greenfield neighborhoods are developed at higher densities than the existing City footprint.
Greenfield and Infill development come with their own set of challenges, but while greenfield development may require completely new infrastructure additions, developers expressed an appreciation for the greater predictability that comes with greenfield. In contrast, while Service Agreement Fees were not applied to infill projects at the time of the study, a different set of municipal requirements apply, and there can be unforeseen challenges in upgrading or transforming existing infrastructure. In 2018, the City of Regina did approve a new Intensification Levy of $3,808 per person on any intensification projects with the existing City foot print, established in the OCP.
A common misconception when purchasing a home is that land developers look at a project in terms of the individual lot cost, but this is far from the case. Instead, developers typically consider the cost of the entire subdivision, including everything from major infrastructure (including water, sewage, landscaping, parks, and roads) to the minor details (including streetlights and sidewalks). It can be very difficult to determine exactly how much an individual lot costs to develop, but developers will typically allocate costs on a front-foot basis.
Although there is much more complexity, we have broken down development costs into eight categories:
|Category||Description||% of Cost|
|Raw Land||the cost of raw, undeveloped land.||15.3%|
|Government fees and levies||all fees and levies charged by the government, charged on nearly every aspect of developing a subdivision.||20.3%|
|Consulting and engineering fees for
planning and design
|the cost of planning and subdivision design, engineering, and consulting.||6.9%|
|Onsite construction services||the cost of for landscaping, surveying, and other onsite services (such as sewage, electricity, roads, and gas lines).||41.4%|
|Overhead||management, administration, and legal fees.||12.0%|
|Financing||the carrying cost of holding land.||2.2%|
Note: Residential land development costs were analyzed using information provided about four separate subdivisions developed by three different companies. To ensure consistency, all costs were converted to a per-lot basis, with each lot comprising an average of 28 front feet.
Housing Construction Costs
One of the main objectives for the studies was to compile construction cost data from various home builders in Regina and then use the aggregate data to analyze construction cost trends. Building on previous studies, the construction costs were categorized using the National Association of Home Builders’ standard categorization format (NAHB, 2016). The twelve main categories listed in Table 2 utilize both tangible and intangible factors.
Construction cost data for three dwelling types was studied. The three dwelling types include: 1,700 square-foot two-storey homes; 1,300 square-foot bungalows; and 1,200 square-foot condominiums. The housing construction cost data was based on information provided by builders in Regina for homes constructed in 2016.
Construction costs were classified into: Planning & Fees, Foundation/Basement, Driveway, Framing, Roofing, Plumbing/Heating/Electrical, Windows/Doors, Drywall/Insulation, Exterior, Interior Finish, and Builder Overhead. An additional category, Miscellaneous, was also added to account for the cost items provided by builders that did not suitably fit within existing categories.
Historical Aggregate Construction Cost Trends
The following table for the three dwelling types include the average costs for each category. The percentage share of each cost category to the total price of a home was also calculated.
|1700 sq. ft. 2-Story||1300 sq. ft. Bungalow||1200 sq. ft. Condo|
|% of price||% of price||% of price|
|Planning and Fees||2%||2%||2%|
|Gross Revenue over Expense||9%||11.3%||13.4%|
*Overhead includes Interest, Insurance, Utilities, Cleaning, Garbage Bins, Taxes, Site Supervision, Administration.
**Miscellaneous includes Appraisals & New Home Warranty
Overall, the study showed that construction costs (excluding the price of the lot) have increased since 2014 for two-story homes by 16.8% and bungalows by 24.9% but decreased for condominiums by 22.9%.
Note: There are no other studies completed in Canada to compare, however the National Association of Home Builders (NAHB) has being conducting national research in this area since 1969. The University of Regina Studies used the U.S. research as a foundation to build their reports, which has allowed for reasonable comparisons. The NAHB U.S. studies show a range of gross margins between 9% and 17% since 2006, decreasing during the financial and housing collapse from 2008 to 2012, but returning to more historic norms starting in 2013.
Development taxes – mechanisms used by municipalities to pay for the growth-related costs associated with new development or redevelopment – can be a very sensitive and sometimes complicated subject. Growth costs are generally used to cover the new infrastructure necessary to support growth, pay down existing debt for past growth, and avoid having taxpayers pay for the costs that serve population growth.
A growing population naturally places more demand on a municipality’s existing infrastructure, and any costs that are not borne by new development must ultimately be paid for by tax payers. In Saskatchewan, the development levies can be charged to cover sewage, water, or drainage works; roadways and related infrastructure; parks; and recreational facilities. They do not, however, pay for the ongoing operating costs or infrastructure renewal down the road. Major decisions have recently been made to deal with capacity limitations of existing infrastructure coupled with rapid growth and tighter regulations.
With city officials wanting to see Regina’s population grow to 300,000 by 20403, several major infrastructure projects will need to be funded. The municipality has adopted a “growth pays for growth” policy, in which new development covers the cost of growth-related infrastructure upgrades or additions.
The following is the City of Regina Service Agreement Fee rates from 2006 to 2018:Important Note: Since the 2017 Cost of Construction study was completed, significant public policy changes occurred that added significant additional cost to the construction cost of a new home:
- Service Agreement Fees increased by $62,000 per hectare;
- Numerous infrastructure requirements that were previously paid by Service Agreement Fees were made an expense internal to the subdivision, adding over $100,000 per hectare to the cost of development;
- Development Standards and Design Requirements on several infrastructure components have increased exponentially, adding millions of dollars in additional costs to building a new neighbourhood;
- Changes to PST on Construction Services was implemented by the Provincial Government;
- National Building Code 2015 was adopted by the Province;
- The new NBC 9.36 (Energy Code) goes into effect Jan 1, 2019; and
- A new Intensification Levy goes into effect in October of 2019.
At the same time new mortgages rules and mortgage stress tests were implemented by the Federal Government. This has reduced many new home buyers purchasing power by approximate 15% or taken other previously qualified home buyers right out of the market. New home prices have been decline or flat for the most part from the time of the report until April 2018 according to StatsCan New Home Price Index (NHPI). Although, a new study has not occurred for 2018, it would be safe to assume that margins on a new home has declined over the past years as costs have continued to go up and the prices have remained flat or slightly declined.
The Housing Business Supply Chain:
A supply chain is a series of organizations that collaborate and integrate their services for a product to become a reality for a consumer. The figure shows the main players in the Regina and region new home construction supply chain. As the Figure illustrates, land developers are the direct customers of the City of Regina; home builders are the direct customers of the developers; and home buyers are the direct customers of the home builders.
As is the case in all supply chains, the objective is to deliver the maximum value to eventual customers. To achieve this goal, coordination and collaboration among all players is of utmost importance. Specifically, information sharing. Decision making with a lack of information from direct players typically yields speculation and added costs to account for uncertainties, which in turn results in increased costs to the consumers. There are numerous lessons to be learned from this area of supply chain management, especially regarding the value of information sharing and direct collaboration to achieve goals.
Where the process in the supply chain Breaks Down is:
- Excessive/obsolete/subjective controls and regulations
- NIMBY attitudes and intervention
- False equivalences in public consultations
- Limited land availability
- Complicated and increasing fees
Key Finding from the three studies (2012, 2014 & 2017):
Four Drivers of Cost
- The Cost to Develop residential land almost tripled in the last decade, with a significant cost driver raw land;
- Development taxes, government fees and levies have risen by an extraordinary amount;
- Higher Sub Contractors Fees & Material mixed with higher construction standards; and
- Consumer increasing demand for amenities and quality surroundings.
Impact of Government Costs on Affordability
“Because the cost of building new homes determines the price of existing homes, if the city shifts the costs of suburban infrastructure onto new home developers, the prices of all houses in the city will increase by the cost, per lot, of that infrastructure. All houses will increase in price and, therefore, decrease in “affordability”. (Source: Chris Bruce, Ph.D. and Marni Pluncket – The Impact of Urban Growth on Affordable Housing Oct 2000)
What this means is Growth Pays for Growth Strategies taken on by the City of Regina, which are allowed by the Planning & Development Act of the Government of Saskatchewan, have played a significant role on the erosion of housing affordability in our City and Province.
Under new mortgage stress tests, every time the price of a new built home in Saskatchewan goes up by $10,000, 2.3% of Saskatchewan households are priced out of home ownership.
Home Ownership is very good public policy. To learn more about why #homeownershipmatters check out this video: