CHBA Q3 Housing Market Index Shows Rising Interest Rates Leading to Fewer Housing Starts
OTTAWA – October 27, 2022 – The 2022 Q3 release of the Canadian Home Builders’ Association (CHBA) Housing Market Index (HMI) does not bode well for Canada’s need to build more homes. Multiple rate hikes to curb inflation have resulted in fewer people buying new homes, a resultant sharp drop in builder confidence, and a substantial slowing in future housing development activity. The HMI shows a strong correlation to the housing starts numbers that we will see in six months, so expect a severe dip in starts in the coming quarters. The HMI’s survey shows that as a direct reflection of the decline in homebuyer traffic from rising interest rates, builders and developers are scaling down the number of homes they had planned to build, or cancelling projects entirely. This necessitated direction of the industry is at odds with the federal government's stated goal of needing 3.5 million homes over the next decade, which requires doubling housing starts, to address housing affordability.
The HMI, which is a leading indicator about the current and future health of the residential construction industry in Canada, is at an extreme low for the Single-Family market (43.3/100) and Multi-Family Market (35.9/100). Q2 of 2022 saw the first big drop in builder confidence coming off of the pandemic boom, and this quarter the HMI plummeted an additional 22.3 points and 42.0 points for single- and multi-family respectively. This is translating directly into a decline in housing supply: in Q1, 80% of builders believed their company would have as many housing starts in 2022 as it did in 2021; now in Q3, only 45% of builders still believe that. Traffic in sales centres is down dramatically, and buyers are delaying purchasing because of higher interest rates. As a result, 55% of builders are building fewer units and 24% are cancelling projects altogether.
Meanwhile, national average construction costs remained elevated in Q3, still at over $80,000 higher than prior to the pandemic for a typical 2,400 sq.ft. house. Lumber prices are coming down, but that reduction is more than made up for by increases across most other products and materials. Delays in manufacturing and delivery remained rampant in the sector in Q3, with supply chain issues continuing to result in an average of 11 weeks in delays in home completions, up 1 week as compared to Q2. Houses remain more expensive to build than they were before the pandemic, but lower interest rates previously helped with affordability – with input costs still high and interest rates still climbing, affordability is taking a big hit.
Of course, housing affordability affects not only potential new homebuyers, but renters as well, and the two groups and issues are very closely related. Increasing interest rates affect first-time home buyers the most, knocking well-qualified buyers out of the market and keeping them in rental units, which in turn furthers shortages in the rental stock, driving up rents.
“While the market may be seeing a softening of housing prices as a result of increasing rates, it does not mean affordability is improving, since the cost of financing has increased. And with the slowing in construction activity, the supply/demand imbalance will get worse, keeping prices high moving forward and eroding affordability. Increased interest rates mean it’s less affordable to purchase a home. This is affecting home buyers and renters alike,” explains Kevin Lee, CEO of CHBA.
To avoid the potential of a housing-driven recession, and to get housing starts back on track, CHBA advises that we will need an end to rising interest rates in the near future. Being so tied to interest rates, new housing construction activity is slowing at an alarming pace, as shown by CHBA’s HMI (but not yet in housing starts, which are a function of sales in past quarters). It will take a pause in rising interest rates to enable new housing construction sales to get back on an appropriate track, while the impact of high interest rates can continue to make its way through the system and have its full effect on the rest of economy, which takes time in less interest-sensitive parts of the economy.
Given the state of deteriorated affordability – which will last some time – CHBA advises we will also need targeted measures to allow well-qualified first-time buyers to enter the market to help supply get back on track. Lee notes that: “A return to 30-year amortizations for well-qualified first-time buyers would be a perfect tool to get first-time homebuyers back into the market while also supporting more missing-middle and other forms of entry-level housing.”
CHBA also recommends that the stress test, which currently reduces the buying power of those at the margins of qualifying by approximately 4%, should also be adjusted to reduce the test rate on a declining basis for lower-risk, longer mortgage terms of 7 and 10 years, which would further support affordability while also adding to market stability. And finally, the $350,000 to $450,000 thresholds that were set for the GST New Housing Rebate back in 1991 need to be updated, since most homes in major cities are priced well above that threshold—an increase in the thresholds for the rebate would have direct affordability benefits, especially for first-time buyers.
CHBA’s HMI provides a leading market indicator for both the single-family and multi-family markets in Canada, before permits and starts. Released on a quarterly basis, the HMI is providing insight into the industry, including many of the issues that are affecting housing affordability, with a strong correlation to future housing starts. The data for the CHBA HMI comes from an exclusive panel of hundreds of CHBA homebuilders and developers from coast to coast. Every quarter, this panel responds to a series of questions about market conditions. CHBA then uses proprietary statistical analysis to prepare the quarterly HMI. In addition to the standard HMI questions, each quarter CHBA asks “special questions” that allow the Association to gather data and insights into current issues affecting the industry across the country.
For more information on CHBA’s HMI, including the detailed methodology and key takeaways, please visit the official CHBA HMI webpage.
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MEDIA INQUIRIES
Journalists wishing to interview Kevin Lee, Chief Executive Officer of the Canadian Home Builders’ Association are encouraged to submit their request by email to media@chba.ca.
About the HMI
CHBA’s Housing Market Indicator (HMI) provides a much-needed leading indicator about the current and future health of the residential construction industry in Canada. It is the only sentiments indicator for the sector in the country and has been modelled on the very successful and influential American version delivered by the National Association of Home Builders’, which is used regularly by financial analysts, the Federal Reserve, policymakers, economic analysts, and the news media. Through the CHBA HMI, CHBA is doing the same for Canada. The CHBA HMI is released on a quarterly basis, providing a regular litmus test for the residential construction industry, which is one of Canada’s largest employers and whose health is critical to the overall Canadian economy.
To deliver the HMI, CHBA surveys an exclusive expert panel made up of single-family and multi-family builders from across Canada that reflect market conditions across the country. Panel participants are asked to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes. HMI numbers are not seasonally adjusted. Over time as more data is collected, the HMI will indicate trends in the market and will likely be able to predict housing starts six months in the future.