Q4 Builder Data Reaffirms Importance of End to Interest Rate Hikes
OTTAWA – January 31, 2023 – The latest Canadian Home Builders’ Association (CHBA) Housing Marketing Index (HMI), which is a leading indicator about the current and future health of the residential construction industry in Canada, shows the extreme effect that interest rate hikes are having on reducing housing starts for 2023, meaning less housing supply ahead when so much more is needed. CHBA’s 2022 Q4 HMI results showed industry sentiment dropped yet again to staggering lows, reflecting lower sales and buyer traffic that will translate into less housing starts in the months ahead.
The HMI, which is on a scale of 0 to 100, was at an all-time low for single-family builders at 26.2, while the multi-family builder HMI dropped to 26.0, also a historic low. The HMI peaked in Q1 last year at 89.4 for single-family builders and 88.8 for multi-family builders, and has been rapidly declining since. With the HMI a precursor to what we can expect with starts in about 6 months, expect a continued slowing in housing starts through the first two quarters of this year—a trend in the opposite direction of the government’s goal to double housing starts. The composite expected drop in 2023 starts for HMI panelists is 28.5% fewer starts this year compared to last.
The reason for the drop in the new construction market is simple: rising interest rates have greatly curbed sales and overall traffic of prospective homebuyers, with some delaying purchases and others having difficulty qualifying for mortgages. At a time when we need more housing, 72% of builders now say they expect to have fewer starts in 2023 than they did in 2022, and 30% have cancelled projects.
With the builder sentiment numbers so bleak, the Bank of Canada’s latest announcement of an expectation to pause interest rate hikes in the coming months, while it assesses the impact of the cumulative increases, is an important signal to buyers and industry. Over half of builders responding to the HMI survey said it is critical for their business that interest rates stop rising so that buyers return to the market. Now with interest rates hopefully plateauing and the Bank of Canada saying evidence suggests that core inflation has peaked, it is expected that prospective homebuyers who have been waiting on the sidelines will have the confidence to start looking at home purchases again that have been delayed through the interest rate climb. This will be critical to get new home construction back on track. However, headwinds are still present in the market, as some homeowners who purchased homes over the past couple of years that are now being completed will have trouble getting financing at closing in the higher interest rate environment.
Meanwhile, as household formation and immigration have continued through this slow period, some pent-up demand for housing has stockpiled while Canadians have been delaying purchases. A long backlog of underbuilding, increased immigration targets and changing household configurations continue to contribute to the need to build more homes. With the continued demand, home prices are expected to return to a more normal appreciation pace going forward. That said, the Office of the Superintendent of Financial Institutions (OSFI) is now in a consultation phase around it’s B-20 guidelines, which depending on implementation, could further tighten lending rules in the months ahead and make it harder still for buyers to enter the market.
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 provides 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.
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.