Several factors are conspiring to give construction costs a lift. This won’t happen overnight. But it does mean that sometime in the next six months, the current grace period will expire. First are market conditions. Homebuilding in the U.S. has touched bottom. While there is the danger of more foreclosures ahead as government financing programs run out, further serious drops in starts or home prices are unlikely. Record low mortgage rates will continue to backstop demand.

In Canada, it appears that the floor level for housing starts is about 150,000 units annualized. Existing home sales have shocked everyone with how energized they are. Again it is the low interest rates, greater confidence that the recession is over and a reduced number of listings.

Non-residential construction will take a good long time to recover. There is too much excess capacity in office space and on the plant floor. However, government sponsored non-residential work, which is mainly in the engineering/civil category, still has a lot of legs as stimulus money flows both north and south of the border and in Asia and Europe, for that matter.

A key ingredient in construction material costs is raw material prices. In the final quarter of last year, when the whole world was anxious about financial sector collapse, investors raced to put their money into U.S. dollars – in the form of government securities such as Treasury Bills. Now those fears have subsided and money is being moved from ultra-safe investments into riskier assets. That is why stock markets have come back to life. It also partly explains the upward shift in some commodity prices such as oil. Precious and base metals have also benefited from this.

The revival in the Chinese and some other south-east Asian economies also partly explains the return from the dead of some commodity prices. Some of this is stockpiling to prepare against future shortages. China is able to do this because it has a huge pool of foreign currency reserves earned from earlier export sales.

In most cases, and for products heavily used in construction, commodity prices are shading upward. Copper, nickel, aluminum and even lumber, to some small extent, are on the move.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

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10/25/2009 - posted by Maiden X

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