Canada is in the middle of a real estate boom, but home builders are feeling less confident. The Canadian Home Builder Association (CHBA) released its Housing Market Index (HMI) for Q3 2021 this week. The index, which measures builder sentiment, pulled back in the last quarter. Higher construction costs and an updated stress test is beginning to weigh on sales.
Canadian Home Builder Confidence Is High, But Fell Last Quarter
The HMI for single-family builders (detached, semi, townhomes, etc.) dropped last quarter. The index fell to 77.8 in Q3 2021, a decline of 5.1 points from the previous quarter. It peaked in Q1 2021 at 83.2 and has dropped 7% since then. Confidence is deteriorating, but this is technically still a very high level. No need to get the posse together for a bailout, but we’ll circle back to some of the concerns dragging, in a second.
Multi-family (apartments, duplexes, etc.) builders were hit with a sharper decline in sentiment. The confidence index for the segment fell to 77.6 in Q3 2021, down 6.3 points from the previous quarter. That quarter also happens to be a peak for sentiment, so this is the first drop, and not necessarily a trend. Confidence is just a touch under where single-family home builders are at.
The OSFI Mortgage “Stress Test” Is Dragging On New Home Sales
A new issue Canadian home builders face is the OSFI stress test changes, which came into effect in June. The stress test is designed to ensure borrowers can pay higher financing costs later. It also happens to throttle credit growth, and many may argue it’s needed with growth at a multi-year high. It was expected to have a minimal impact, but that doesn’t appear to be the case.
Over a quarter (26%) of home builders have said the new stress test changes have affected sales. Multi-family home builders were disproportionately affected, with 32% claiming it hit sales. In a normal market, this would typically throttle home price growth. In this market, where home builder costs are rising, it’s throttling supply. New housing starts are near a record high, but buyers running out of debt helps to explain the fall in new starts.
Canadian Home Building Costs Are Soaring — Especially Lumber
Like the cost of everything these days, the cost of home building has soared. Annual growth for lumber costs went up by more than $20,000 for 88% of CHBA members as of Q3 2021. The survey found 25% of home builders have seen lumber costs increase more than $40,000. Lumber prices have crashed from the peak, but they’re nowhere near pre-pandemic prices.
Lumber isn’t the only rising cost home builders are facing — most of their expenses are soaring. The trade shortage has pushed the average annual increase in labor cost 19% higher as of Q3 2021. In addition, a third of builders saw material costs (ex. lumber) increase over $20,000 from last year. The good news is this is 17% lower than the previous quarter, so costs are coming down. Just not very fast.
The Average Canadian Home Costs $57,590 More To Build In Q3 2021
We know, this is sounding kind of expensive — how much is this going to cost? The average home is now $57,590 more expensive to build in Q3 2021, compared to a year before. The craziest part is $34,560 of that is just lumber costs, in a country that’s one of the biggest suppliers of lumber.
Not all developers are rushing to pass costs onto consumers though. More than half (53%) of home builders said they’ve delayed projects until costs stabilize. Some developers surprised by costs have had to circle back and ask for more cash to finish the project. It appears many are trying to avoid a similar situation. Once again, this a little context to falling new home starts — out-of-control inflation. Your move, Bank of Canada.
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