Builder sentiment plummets in the face of rising interest rates
OTTAWA – July 13, 2022 – The 2022 Q2 release of the Canadian Home Builders’ Association (CHBA) Housing Market Index (HMI) shows the sobering impact that rising interest rates, added on top of ongoing challenges sourcing skilled trades professionals, is having on builder confidence. The single-family and multi-family HMI indicators, which were at record highs in the high eighties in Q1 (at 89.4 and 88.8 respectively) have tumbled to 65.7 for singles and 59.9 for multis. Today’s Bank of Canada rate hike will no doubt further dampen the building industry outlook in the coming months.
The CHBA HMI is a leading indicator about the current and future health of the residential construction industry in Canada. As an industry sentiment index, it provides warning signals ahead of building permits and housing starts. Low HMI scores indicate a strong likelihood of falling housing starts in the coming months—this at a time when Canada is looking to increase, not decrease, housing starts to improve housing affordability.
The HMI for single-family builders of 65.7 in Q2 2022 reflects a dramatic decline of almost 24 points since last quarter. The previous low was 77.8 in Q3 2021 when escalating supply chain issues were creating much uncertainty. The even more dramatic drop of the multi-family HMI down to 59.9 in Q2 2022 is a decline of 29 points since the last quarter, and a sign that high-rise construction could slow substantially. Its previous low was 77.6, also in Q3 2021.
The interest rate increases add to the challenges of ongoing supply chain issues and labour shortages that are still resulting in an average of 10 weeks in delays in home completions and driving up costs. Construction costs on a 2,484 sq. ft. home are up $78,000 since the start of the pandemic, and labour costs are estimated to be up 26%.
And now, the impacts of the interest rate hikes on potential buyers of newly constructed homes are direct and substantial: of those builders and developers surveyed, 50% of respondents indicated that as a result of the interest rate increases there has been less traffic of prospective buyers, 45% said that buyers are delaying purchasing, and 38% say buyers have started changing their minds about purchases.
“While raising interest rates target curbing overall inflation in the economy, their likely effect on slowing housing starts is at odds with the need to get more supply online to address Canada’s housing supply shortage and the chronic housing affordability issues that come with demand continually outstripping supply. Furthermore, rising interest rates affect first-time home buyers the most, knocking more and more well-qualified buyers out of the market, keeping those would-be buyers in rental units and causing further shortages in the rental stock as well. Unless we build more homes, we will always have a supply and demand imbalance and affordability challenges. With the current interest rate environment, there will need to be government policy to counter its impacts on new construction, or we will fall further behind with housing supply deficit,” says CHBA CEO Kevin Lee. “A return to thirty-year amortizations for first-time buyers on entry-level homes would be one such measure that continues to make a lot of sense and could help young people still enter the market,” he adds.
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. The data for the CHBA HMI comes from an exclusive panel of CHBA homebuilders from coast to coast. Every quarter, this 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.
Journalists wishing to interview Kevin Lee, Chief Executive Officer of the Canadian Home Builders’ Association are encouraged to submit their request by email to [email protected].
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.