Canada’s planned builder boom is turning into a bust. The Canadian Home Builders Association (CHBA) released the results of its Q2 2024 survey. They found that home builder sentiment remained negative for an 8th consecutive quarter. As a result of weak demand, most plan to significantly reduce the numbers of homes they build—by half on average.
Canadian Home Builder Sentiment Has Been Negative For 2 Years
Canadian home builder sentiment took a sharp turn in the second quarter. The CHBA’s quarterly survey shows Q2 2024 was the 8th quarter that sentiment remained in negative territory. At the national level, sentiment hasn’t quite returned to the all-time low reached at the end of 2022. However, builders remain less-than-optimistic about the prospects of building.
As one would expect, there are significant regional differences in the sentiment. British Columbia and Ontario have seen sentiment drop to a record low level. Considering the two provinces represent the majority of new starts in 2024, this is an underappreciated (and big) problem.
On the flip side, the loss of pricey provinces is a gain for those that are slightly more affordable. The Prairies went from negative sentiment while other regions hit record lows in 2022, but are now sitting in positive territory. Atlantic Canada, a minor share of new starts, has remained just above the positive threshold for the past 6 quarters.
The CHBA attributes the shift to regional affordability. The general trend is residents are leaving more expensive provinces, resulting in weaker demand and negative builder sentiment. Less expensive regions benefitting from this boom are helping to boost demand for new housing, and builder sentiment.
Most Canadian Home Builders Are Cutting New Home Plans In Half
Canada’s home builders plan to build a lot less going forward. Most (61%) now see fewer new home starts in 2024 than 2023, as demand softens. On average, those planning to build fewer homes have cut their estimate in half over the time frame. That’s a fairly substantial pullback.
Keep in mind that there’s a lag between qualified demand for pre-construction and housing starts. Sentiment that began eroding two years ago is most likely behind the decline observed in the current year. The weakness experienced today will be seen in the future. Similarly, if things pick up today, the positive impact on new starts wouldn’t be seen for months.
Most Builders Blame Rising Interest Rates For Woes
Most Canadian home builders, regardless of region, blame interest rates for their negative sentiment. The CHBA survey found 65% of builders in Q2 2024 plan to build fewer homes as a result of elevated rates. Nearly a third (31%) of builders claim they’ve flat out canceled new developments as a result of rising rates.
Attributing the decline in demand to interest rates is an interesting point, though potentially misguided. The US Federal Reserve recently took a dive into this issue, explaining the “naive” assumption regarding housing affordability and rates. The world’s largest central bank argues that affordability would have eroded faster without rising rates, weakening the ability for monetary policy intervention down the line. They further explain that a real discussion about affordability requires consideration of the quantity of debt needed to buy a home, not just the share of income needed to service that debt.
As home builders face rising input costs, they appear to have adopted a similar position. They don’t see input costs correcting, or a stronger loonie helping to reduce the net cost of commodity acquisitions.
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