By Paul Vieira
Pessimism abounds among Canadian home builders about planned activity in 2024, with over two-thirds reporting that sales either stalled or deteriorated in the fourth quarter due to higher interest rates, according to an index measuring confidence in the sector.
The quarterly Canadian Home Builders' Association's housing-market index is modeled on a similar gauge produced by the National Association of Home Builders in conjunction with Wells Fargo. The fourth-quarter results indicate pessimism fell to a record low in terms of building single-family homes, the Canadian association said. Confidence among companies building multifamily units, like condominiums, also deteriorated.
The single-family home index fell to 24.6, while the multifamily index dropped to 29.1. A reading below 50 indicates a greater share of home builders describe economic conditions as poor.
"The balance of builder sentiment deteriorated further into pessimism," the Canadian association said, adding that a combination of stretched affordability and mortgage-qualifying challenges for would-be home buyers are making the situation worse. The survey results are based on questions posed to 184 builders between November 23 and December 15.
The data could mark a setback for Canadian policymakers, who are pushing to increase supply to alleviate a housing-affordability crunch and an immigration-fueled population jump. Vacancy rates are at a record low, according to Bank of Canada research. And the central bank's housing-affordability index--which measures how much after-tax income goes toward shelter expenses--is at its highest level since about 1981, when mortgage rates in Canada were above 20%.
The Canadian government is offering municipalities billions to change zoning laws to allow for more density, and is capping the number of temporary visas issued to foreign students to address housing needs.
Canadian housing starts for 2023 fell 7% from the prior year, to 223,513, with authorities attributing the decline to weakness in the construction of single-family detached homes.
According to the Canadian Home Builders' Association, 65% of builders said sales traffic was weak in the fourth quarter, and 5% reported deteriorating sales in the three-month period. Nearly two-thirds of respondents, 64%, said they built fewer homes in 2023 due to the high interest-rate environment. About 40% of builders said they expect to have the same number of starts in 2024 as last year, while 36% expect fewer projects.
The Bank of Canada kept its main interest rate unchanged last week at 5%, with officials saying they were focused on how long it needs to stay at that level to reach 2% inflation. A majority of economists surveyed by The Wall Street Journal expect rate cuts to start in the second quarter. Shelter costs are expected to act as a "material headwind" toward reaching 2% inflation.
Canadian builders reported that the total cost for lumber and other materials required to build a standard single-family detached home are roughly 65,000 Canadian dollars, the equivalent of US$48,000, higher since the pandemic. Furthermore, builders estimate that, on average, the cost to hire trades people has climbed 33% since the start of the Covid-19 pandemic.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
01-30-24 1141ET
