High interest rates are a significant roadblock to construction, and the lumber market is suffering
High interest rates and borrowing costs are weighing down on homebuilder sentiment in Canada – and a sluggish construction outlook is helping pummel lumber prices, which have plunged since last year.
The Canadian Home Builders’ Association’s first-quarter Housing Market Index (HMI), which measures homebuilder confidence across the country, saw builders anticipate a slow pace of sales and fewer starts in the coming months, with fully 54% expecting overall starts to be lower this year than in 2023.
That survey was conducted before the Bank of Canada opted to trim its benchmark interest rate by 25 basis points at the beginning of June. Still, with borrowing costs remaining high compared to previous years, the lumber market is faced with a familiar headache: too much supply, too little demand, and a steep drop in prices.
Lumber prices have remained rooted below $400 (US) per thousand board feet for the past 12 weeks, according to the US’ National Association of Home Builders, marking the longest such slump for five years.
Global factors weigh heavily on Canadian outlook
Canadian and US lumber mills have borne the brunt of those construction woes – but the crisis has also been compounded by a gloomy international outlook, according to a Vancouver-based wood market expert.
Russ Taylor (pictured top) told Canadian Mortgage Professional that the European lumber market is “dead” thanks to heavy borrowing costs and a series of other factors. “They’re also impacted not only by high interest rates, but high energy costs are still an issue,” he said, “and they’ve got these log shortages over there, so it pushes up the cost of logs and the market prices are going down. So they’re also losing money.”
Canada is launching the second round of its Housing Accelerator Fund (HAF) to expedite home construction, addressing the nation's housing crisis. The HAF application portal reopens from July 15 to September 13.https://t.co/4BkX0txSi7#mortgagenews #housingcrisis
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 10, 2024
China, meanwhile, has seen its housing market weaken and while Japan’s outlook tends to fluctuate, Taylor said it remains a small market with less influence on the international picture. Each major lumber-producing country, though, is facing a similar quandary: efficient, optimized mills with nowhere to sell their product.
For Canada, then, international headwinds are likely to continue contributing to a “real downward spiral”, according to Taylor, until a semblance of normality returns to the market. “Balance in supply and demand is the key, and I point [the issues] squarely at the high interest rates around the world that are stalling everything,” he said.
“That’s now coming back to the mills and they’re taking lower and lower prices and burning cash – and the big companies will do that a lot longer than the small, private ones.”
When will the tide turn for Canada’s construction market?
Better news could be on the horizon, with a downward trend in inflation during recent months and a slowing labour market helping strengthen expectations of further interest rate cuts by the Bank of Canada in the months ahead.
With 65% of builders indicating in CHBA’s Q1 HMI that high rates had caused them to build fewer units than usual, and 31% noting they had cancelled projects as a result, a series of cuts before the end of the year would certainly be welcomed by the construction sector.
On the lumber side, Taylor said mill curtailments in July were likely prior to summer shutdowns, with balance potentially set to creep back into the market before the end of 2024. “Maybe in September, we’ll start to see a bit of a rally,” he said.
“Finally – and I would say certainly by October – we’ll get some upside, but again temporarily until we get into a much stronger market, which is probably going to be the second half of next year.”
Royal Bank of Canada (RBC) expects Canada’s central bank to lower rates again at its next announcement, scheduled for July 24, with the banking giant’s overall expectations signalling a total of 100 basis points in cuts (including the June move) is likely by the end of the year.
A further 100-basis-point trim next year – RBC’s expectation – would see the Bank of Canada’s trendsetting rate fall to a “neutral” point of 3%, significantly down from the two-decade high of much of this year and 2023.
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