These are heady times for residential builders.

A new report prepared by the Conference Board of Canada suggests that low mortgage rates and robust population growth are combining to create a hugely positive period of growth for homebuilders.

The good times, however, won’t be without challenges, especially as the industry navigates soaring material prices and shortages of skilled workers.

In its latest Industry Lens report for the sector, issued on April 19, the Conference Board finds that the volume of residential housing units under construction is near a record high in many cities, and homebuilders are racing to replenish low stocks of completed and unsold units—especially single-family homes and apartments.

Residential construction enjoyed an up-and-down year in 2020. Where starts were hit hard in the second quarter of the year, they rebounded in a big way over the remaining months as provinces declared home building an essential service.

Output recovered from an annualized decline of 31 percent in the second quarter of the year to post gains of 64 percent in the third quarter and 17.7 per cent in the fourth quarter. Housing starts finished the year at more than 217,800 units—a gain of 4.4 percent over 2019’s total, and well above the annual average of 201,200 for the 20-year period ending in 2019.

“There’s no question that residential construction has recovered and maintains a positive long-term outlook,” says Robin Wiebe, a senior economist at The Conference Board of Canada. “We estimate that housing starts trailed household formations over the past 10 years, generating a shortfall of 140,000 units. With immigration poised to surge in the next few years, household requirements should remain strong.”

Despite this positive outlook, the industry will nonetheless have to grapple with several key issues, including increasing lumber prices and a shortage of skilled tradesworkers.

The latest report from BuildForce Canada suggests that employment in the residential sector is expected to rise by more than 32,200 workers through 2024, before ending the decade at more than 20,000 workers above 2020 levels. Going forward, it says, the industry will have to place more of a focus on hiring workers from traditionally under-represented groups such as women, Indigenous people and new Canadians.

A further challenge for the industry will be controlling input costs such as wages and material prices. Rising employment has empowered workers to bargain for higher wages. Average weekly earnings rose 3.7 percent last year, says the Conference Board. That figure caps a 27-percent increase in average weekly earnings since 2010—well above the gain in the consumer price index of roughly 18 percent.

“The good news for people employed in the residential construction industry is that we anticipate wages to rise by about three per cent annually between 2022 and 2025,” says Wiebe. “For builders, they will need to navigate labour shortages and uncertain land supplies if they are to make a profit in the medium term. Some developers seem to be snapping up available land in anticipation of future shortages.”

Soaring lumber prices have also contributed significantly to a rise in new housing prices. The price of softwood lumber rose by an average of 70 percent in the second half of 2020, and about 40 percent for plywood.

The Conference Board expects price increases to accelerate in 2021, with construction costs rising by 4.3 percent in 2021, and by a further 2.7 percent in 2022. It also expects homebuilders’ profits to increase. Revenues rose by 6 percent in 2020—with especially high gains reported in the third and fourth quarters of last year. Gains of 10 percent in 2021 and 5 percent in 2022 are projected.