In 2012, 2015, 2017 and 2018 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.
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. The research for these reports 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. Each report ultimately builds on data from previous reports with more recent and therefore relevant statistical information available.
The primary objectives of these reports are to:
- Analyze Regina’s broader market and demographic trends over time, comparing local data with that of aggregate Canada and neighbouring cities;
- 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 to analyze trends in costs associated with the construction of new homes; and
- Examine the effects of government policy on the industry.
Highlights from the Regina Residential Cost of Construction 2018 Report
Data collected by the University of Regina’s Centre for Management Development (CMD) in 2018 indicates that population growth in Regina is the one of the biggest factors affecting housing construction. Regina has consistently had very high growth rates in comparison to the rest of Canada. While 2018 saw a decline from the previous year, the population growth rate was still nearly double the national average, at 2.25%.
A growing population necessitates that planners, regulators, developers and builders work together to accommodate a greater number of people. A growing population increases the demand for housing which has resulted in higher housing prices over the years. Since 2007, housing prices in Regina have increased by over 60%, though, the majority of these price increases took place between 2007 and 2012.
From 2012 onward, housing prices have slowly been stabilizing, and they have even begun to decrease in the last few years. Recent price decreases, coupled with consistent increases in the median family income brings Regina’s price-to-income ratio to 2.9, which is less than half of the Canadian average. As housing prices continue to stabilize, Regina is establishing itself as one of the most affordable Canadian cities to live in. However, despite boasting one of the country’s lowest price-to-income ratios, for the average home buyer in Regina, this does not paint the full picture. The full price of the home itself has no impact on the day to day life of a buyer, unlike the monthly associated costs.
Another important factor affecting the housing market in Regina is population density. Regina’s current population density ranks 95th among census subdivisions in Canada, at 1,195.2 persons per square kilometer. Regina’s Official Community Plan (OCP) has mandated that new neighborhoods and new mixed-use neighborhoods must achieve a minimum overall gross population density of 50 persons per hectare or 5,000 persons per square kilometer. Therefore, one of the main restrictions in land development in Regina is keeping with city standards for population density.
Regina’s increasing population provides countless economic benefits for both the city and it’s citizens, but it also comes with several challenges. To accommodate roughly 6,000 more people a year, two very important questions must be considered: When/where is improved infrastructure necessary, and who should pay for the city’s growth?
The Cost of Land Development
When it comes to deciding when/where improved infrastructure is necessary, more goes into it than meets the eye. 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 several major factors. The first factor is 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 comes 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.
According to the Official Community Plan (OCP), the target for growth and land development in Regina is 30% Infill and 70% Greenfield. However, most of the city’s residential development is Greenfield (beyond the 30:70 ratio). This leads to further expansion of the city’s boundaries. In 2018, the City of Regina approved a new Intensification Levy of $3,808 per person on any intensification projects within the existing city footprint. It is important to note though, that new Greenfield neighborhoods are developed at higher densities than the existing city footprint. Both 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.
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 the exact cost to develop an individual lot, but developers will typically allocate costs on a front-foot basis.
Although there is much more complexity, we have broken down development costs into nine categories:
|Category||Description||% of Cost|
|Land cost at market value||the cost of raw, undeveloped land.||7.2%|
|Development and government fees and levies||all fees and levies charged by the government, charged on nearly every aspect of developing a subdivision.||18.2%|
|Design and construction consulting||the cost of planning and subdivision design, engineering, and consulting.||8.8%|
|Construction, infrastructure and services||the cost of surveying, and other onsite services (such as sewage, electricity, roads, and gas lines).||46.4%|
|Indirect and administrative costs||management, administration, and legal fees.||4.2%|
|Financing cost||the carrying cost of holding land.||0.4%|
|Maintenance, utilities and upgrade projects||9.2%|
|Sales and Marketing||1.1%|
Note: Residential land development costs were analyzed using information from two major developments totaling 350 lots (about 30 acres). The average size of the samples collected was 29 front-foot.
Housing Construction Costs
In 2017, the University of Regina’s Centre for Management Development (CMD) reported that a portion of overall construction costs had begun to decrease for the first time in nearly a decade. Builders attributed some of these cost decreases to the reduced cost of labour resulting from oversupply, offsetting some of the increased material costs. As of 2018, data indicates that construction costs are still declining in multiple categories. When compared to data collected in 2017, drastic declines were seen within two-story and bungalow homes, which each saw costs decrease by around 13%. These declines in costs came with a higher reduction in the prices for these units; 16.4% for two-story homes and 19.2% for bungalows. Overall, though, construction costs (excluding the price of the lot) have increased since 2014 by 16.8% for two-story homes and 24.9% for bungalows but decreased by 22.9% for condominiums.
One of the main objectives of the CMD 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).
Construction cost data for three dwelling types was studied. The three dwelling types include: 1,700 square-foot two-story 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 2018.
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.
Aggregate Construction Cost Trends
The following table provides data for two dwelling types (a typical 1700 sq. ft. two-story and a typical 1300 sq. ft. bungalow). The table does not provide data for condominiums due to lack of representative samples. The table includes the percentage share of each cost category to the total price of a home:
|1700 sq. ft. Two-Story||1300 sq. ft. Bungalow|
|% of price||% of price|
|Planning and Fees||1.7%||1.2%|
|Gross Revenue Over Expense||7.7%||7.9%|
*Business Overhead includes Interest, Insurance, Utilities, Cleaning, Garbage Bins, Taxes, Site Supervision, Administration.
**Miscellaneous includes Appraisals & New Home Warranty
Overall, the data shows that from 2016 to 2018 total construction costs for two-story’s and bunaglow’s have dropped 12.9% and 13.7% respectively. From 2016 to 2018, the price of a typical two-story home dropped by 16.4% and the price of a typical bungalow dropped by 19.2%. Based on the data collected, these price drops are due to builders being leaner in their expenses (lower overheads), getting cheaper labor due to low market demand, and lower profit margins compared to previous years. Overall, profits have fallen as well. For a typical two-story home, the profit is down 24.8% and for a typical bungalow, profit is down 43.6%.
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.
The CMD also examined the implications of government policy on the housing market in Regina. In 2017, policy changes were implemented which priced Service Agreement Fees into the cost of a lot. Land developers maintained similar profit margins, but the increased cost was passed on to the builders, who then ultimately passed the fees on to the homebuyer. From 2017-2018 Regina experienced a large decrease in housing starts, which may be attributed to lower demand as well as changes to provincial and federal policies. As of 2018, changes to Saskatchewan’s Provincial Sales Tax (PST) and the introduction of increased stress tests on homebuyers have contributed significantly to the slowdown in Regina’s housing market. The federal governments stress test has been heavily criticized by both consumers and developers alike. While it serves purposes in certain Canadian cities with incredibly high housing prices, the same does not apply to Regina. The consensus has been that buyers are held on the sidelines for longer than necessary and have face a significant reduction in their purchasing power.
Regina’s growing population naturally places more demand on a municipality’s existing infrastructure, but who should pay for the city’s growth? Ultimately, any costs that are not borne by new development must be paid for by taxpayers. Development taxes are typically the mechanism used by municipalities to pay for the growth-related costs associated with new development or redevelopment. With city officials wanting to see Regina’s population grow to 300,000 by 2043, several major infrastructure projects will need to be funded. Development taxes can be a very sensitive and sometimes complicated subject. For this reason, the municipality has adopted a “growth pays for growth” policy, in which new development covers the cost of growth-related infrastructure upgrades or additions. Growth costs are essentially charged to developers in the form of development levies in order 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. 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. Over the last two years, significant public policy changes have occurred which have added significant additional costs to the construction cost of a new home. Most notable are changes to development levies, the Provincial Sales Tax (PST), and the federal governments mortgage stress test.
- 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;
- In April of 2017, changes to Saskatchewan’s Provincial Sales Tax (PST) regarding construction services were implemented by the provincial government. Land development services are now subject to PST at 6%, and while PST is no longer charged on construction material, a PST charge of 6% is applied on the final sale price. Multiple builders expressed it caused a 3.5% increase in the final sale price, while other builders saw the final price rise by 6%.
- National Building Code 2015 was adopted by the Province;
- The new NBC 9.36 (Energy Code) came into effect Jan 1, 2019;
- A new Intensification Levy will come into effect in October of 2019; and
- In January of 2018, new mortgages rules and mortgage stress tests were implemented by the Federal Government which have reduced many new home buyers purchasing power by approximately 15% or taken other previously qualified home buyers right out of the market. 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. Additionally, the conventional mortgage interest rate has increased from 4.64% in 2017, to 5.34% in 2018.
Ultimately, based on data from the 2018 Cost of Construction report we may conclude that overall profit margins on a new home have declined over the past few years as costs have continued to go up and prices have remained flat or slightly declined.
Summary of Key Findings
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 following 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.
The process in the supply chain may break down due to:
- Excessive/obsolete/subjective controls and regulations
- NIMBY attitudes and intervention
- False equivalences in public consultations
- Limited land availability
- Complicated and increasing fees
Four Drivers of Cost
- The cost to develop residential land almost tripled in the last decade, with a significant cost driver being raw land;
- Development taxes, government fees and levies have risen by an extraordinary amount;
- Higher material and sub-contractor fees, mixed with higher construction standards; and
- The increased demand on behalf of the consumer for additional amenities and higher 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.
Home Ownership is very good public policy. To learn more about why #homeownershipmatters check out this video: