Pessimism Among Canadian Home Builders Continues in 2024

According to a quarterly index measuring confidence in the Canadian housing sector, Canadian home builders are expressing pessimism about planned activity in 2024. Over two-thirds of builders reported that sales either stalled or deteriorated in the fourth quarter due to higher interest rates.

The Canadian Home Builders' Association's housing-market index, modeled on a similar gauge produced by the National Association of Home Builders and Wells Fargo, revealed that pessimism reached a record low for building single-family homes. Confidence among companies constructing multifamily units, such as condominiums, also declined.

Challenging Economic Conditions

The single-family home index dropped to 24.6, while the multifamily index fell to 29.1. A reading below 50 indicates that a greater share of home builders describe economic conditions as poor.

"The balance of builder sentiment deteriorated further into pessimism," stated the Canadian association. Factors such as stretched affordability and challenges in qualifying for a mortgage for potential buyers are exacerbating the situation. The survey results are based on responses from 184 builders between November 23 and December 15.

Setback for Canadian Policymakers

These findings could pose a setback for Canadian policymakers, who are striving to increase housing supply in order to alleviate the affordability crisis and accommodate population growth driven by immigration. Research from the Bank of Canada reveals that vacancy rates are at a record low. Additionally, the central bank's housing-affordability index, which measures the percentage of after-tax income allocated to shelter expenses, has reached its highest level since approximately 1981, when mortgage rates in Canada exceeded 20%.

Canadian Government Offers Funding to Address Housing Needs

The Canadian government is taking steps to address the housing crisis by offering financial support to municipalities. The government is providing billions of dollars to encourage changes in zoning laws that will allow for more density in housing. Additionally, the number of temporary visas issued to foreign students will be capped in order to alleviate some of the housing pressure.

Decline in Canadian Housing Starts

In 2023, Canadian housing starts saw a decline of 7% compared to the previous year. The total number of housing starts reached 223,513, with the decrease primarily attributed to a decline in the construction of single-family detached homes.

Weak Sales Traffic and High Interest Rates

The Canadian Home Builders' Association reported that 65% of builders experienced weak sales traffic in the fourth quarter. Additionally, 5% of builders reported a deterioration in sales over the three-month period. A significant reason for a decrease in home construction in 2023 was the high interest-rate environment, as 64% of respondents stated they built fewer homes due to this factor. Looking ahead to 2024, 40% of builders anticipate having the same number of starts as the previous year, while 36% expect even fewer projects.

Bank of Canada's Interest Rate Decision

Last week, the Bank of Canada decided to keep its main interest rate unchanged at 5%. Officials emphasized that their focus was determining how long this rate needs to be maintained to reach a 2% inflation goal. A majority of economists surveyed by The Wall Street Journal predict that rate cuts will begin in the second quarter. One of the challenges in achieving the inflation target is the impact of shelter costs, which are expected to hinder progress.

Rising Costs due to the Pandemic

Canadian builders have faced escalating costs for materials and labor since the start of the Covid-19 pandemic. The total cost for lumber and other necessary materials to build a standard single-family detached home has increased by approximately CAD 65,000 (equivalent to USD 48,000). Furthermore, the cost of hiring tradespeople has risen by an average of 33% during the pandemic.

In conclusion, the Canadian government is taking significant steps to address the housing crisis. Financial support is being provided to municipalities to encourage changes in zoning laws, and measures have been taken to manage the influx of foreign students. However, challenges related to weak sales traffic, high interest rates, rising costs, and reaching the inflation target remain for the housing market.