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High interest rates reduce the feasibility of building much-needed new housing
Published on January 30, 2024 • Last updated 19 hours ago • 2 minutes reading time
36 percent of builders expect a decline in construction starts in 2024. Photo by Tyler Anderson / National Post
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Canadian homebuilders are increasingly pessimistic about the outlook for the construction sector next year, which could throw a wrench into the federal government's plans to boost housing supply growth.
According to a survey by the Canadian Home Builders' Association, 36 percent of builders expect construction starts to decline in 2024 compared to last year. The report cited financial constraints due to higher interest rates and an uncertain economic climate as key concerns.
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The survey was released as part of the CHBA Housing Market Index, which measures attitudes to the state of the industry on a scale of 0 to 100. The most recent value of 24.6 marked an all-time low for single-family home builders.
The concern comes after 2023, when 64 percent of builders reported a decline in housing starts due to the prevailing high interest rate environment. Another 30 percent had to cancel ongoing projects and attributed the decisions to the economic headwind.
The CHBA report was released a day after Deputy Prime Minister Chrystia Freeland announced additional measures to encourage the construction of new homes to address a supply shortage that has driven up housing costs across the country.
Freeland told an audience in Ottawa on Jan. 29 that the government aims to “unlock billions in new financing” to build “more homes, faster.”
“What we're doing is making the math work for builders and incentivizing them to build more homes that otherwise wouldn't be built,” Freeland said.
Kevin Lee, the CHBA's executive director, said the financing for developers is helpful, but it's the homebuyers who really need the help.
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“The financing, which is mainly construction financing for apartments and rental apartments, is good,” said Lee. “We need more rental units.”
However, high interest rates have left potential homebuyers, especially first-time buyers, stranded. Lee said the association's key recommendation to boost housing activity would deliver “immediate results” and be “free to the government”.
“Introduce 30-year amortizations for insured mortgages on new build properties and lower the mortgage stress test qualification rate generally and even more so for longer term mortgages of seven and 10 years,” he said.
The proposed changes aim to spread mortgage payments over a longer period of time, easing the burden on aspiring homeowners. Additionally, the CHBA argues that a recalibrated stress test would more accurately reflect economic realities and potentially encourage lending institutions to assist homebuyers.
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“The conclusion is that interest rates directly reduce the viability of much-needed new housing supply. We saw this in 2023 and it will continue in 2024,” Lee said.
“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 would normally build – but the total number of housing starts has fallen in two consecutive years due to high interest rates and due to inadequate political response.”
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