Higher interest rates in Canada are slowing down homebuilding, and it will get even worse

While policymakers are trying to increase the pace of homebuilding in the country, it seems to be just slowing down.

According to the latest report by the Canada Mortgage and Housing Corp. (CMHC), the sharp increase in interest rates seen during the previous year is beginning to restrain the pace of homebuilding.

As the central bank’s interest rate went up significantly last year and at the beginning of 2023, many homebuyers were forced to leave the market, and home prices were reduced compared to their pandemic high levels.

CMHC says the rate increases have made developers extremely cautious when it comes to building new projects. Meanwhile, the same high rates are raising the costs for builders.

The latest data on housing starts shows how this slowdown is evolving.

The report shows that annualized starts fell by 11.2% in March compared to February.

In the first quarter, total housing starts reached their lowest level since the start of the pandemic in 2020, BMO senior economist Robert Kavcic noted.

“Although unstable weather conditions probably affected activity in recent months, it’s about time we look at the bigger picture for Canadian residential construction. The activity is slowing significantly from the previous very elevated levels,” – he said.

Canada’s real estate market and home prices are reporting signs of stabilizing following a correction caused by higher interest rates, but CMHC says the slowdown in construction hasn’t reached its end yet.

Most projects that began last year received financing based on the low interest rates at the beginning of 2022. As a result, those new builds are more affordable and financially viable, CMHC explained.

Certain major urban centres started showing signs of slowdowns in building at the end of 2022, but CMHC expects the cooling to continue this year as the high interest rates affect builders’ ability to provide financing.

“Some projects may be unviable amid today’s financing rates, or construction financing will become even more difficult to get,” – the report stated.

“The full influence of interest rate hikes hasn’t yet been seen in our housing starts data.”