KEVIN LEE
OTTAWA – January 30, 2024 – The Canadian Home Builders’ Association (CHBA) Housing Market Index (HMI), a leading indicator about the health of the residential construction industry in Canada, reports that builders are increasingly worried about the state of industry conditions, and that housing starts will be further repressed in 2024. Canada needs a course correction through policy and financial/mortgage systems changes in order to create an environment conducive to building more much-needed housing supply.
In 2023, the annual average increase in mortgage interest costs was 28.5%, measured by the consumer price index—the largest annual rise on record. Residential construction is extremely sensitive to interest rate changes, and the deteriorating balance of builder opinions about selling conditions and sales office traffic is directly linked to the sustained interest rate hikes, and foreshadows that housing starts in 2024 will be suppressed further unless drastic changes are made. This comes at a time where there is a grave need to begin ramping up housing starts as well as the capacity for starts in the years ahead.
The HMI, which is measured between 0 and 100, reached an all-time low for single-family builder sentiment, at 24.6—surpassing the previous low recorded of 26.2 in Q4 2022. The multi-family HMI declined to 29.1. And reflective of the falling HMI previously, 2023 saw 64% of builders surveyed build fewer homes because of the high interest rate environment and 30% said they canceled projects.
Looking ahead, 36% of builders anticipate still fewer starts in 2024 compared to 2023. Builders are also experiencing widespread concern about closing difficulties on past sales; around one third reported having to make closing accommodations for buyers or reported buyers seeking alternative lending solutions. These persistent problems with closing previously sold builds will also influence builder decisions about going ahead with developments in 2024.
The interest rate impact to housing affordability is compounded by the higher costs of construction that builders face. The survey found that building materials price increases have added an average of $65,000 to the cost 2,400 square foot home compared to prior to the pandemic—lumber prices have come down to a degree off of their highs, but other materials have continued to climb. Builders often comment that conversations with potential homebuyers focus on explaining the higher costs of construction incurred. Given that the survey also found a narrow breadth of abnormal supply chain disruptions—reducing the growth rate of costs—it is probable these higher construction costs are now the new normal.
“The takeaway is that the interest rates are directly lowering the feasibility of building much needed new housing supply—we saw this in 2023 and it will continue in 2024. The 2022 federal budget set a target of building 5.8 million homes over the next decade – that’s 3.5 million more than we normally would build – yet total housing starts have fallen in two consecutive years thanks to high interest rates and insufficient policy response,” said CHBA CEO Kevin Lee. “ All levels of government need housing policy that is focused and coordinated on improving affordability and supply through smart policy changes. In terms of the high interest environment, our top recommendations that would provide immediate results are no-cost-to-government policy options to help get well-qualified first-time buyers into the market: introduce 30-year amortizations for insured mortgages on new construction homes, and lower the mortgage stress-test qualifying rate in general and still more so for longer 7- and 10-year term mortgages.”
For more information on CHBA’s HMI, including the detailed methodology and key takeaways, please visit the official CHBA HMI webpage.
Kevin Lee is CEO of the Canadian Home Builders Association
