Higher interest rates in Canada led to a significant reduction in housing starts in 2023, according to a report from the Canada Mortgage and Housing Corporation (CMHC). Approximately 30,000 fewer homes were built due to rising borrowing costs, representing a 10% to 15% decline in new construction compared to previous years. This slowdown particularly impacted the development of condo buildings across much of the country. With the cost of financing going up, many developers found it harder to proceed with new projects.
The increase in interest rates was a direct response to the Bank of Canada’s efforts to control inflation by hiking its key rate over 2022 and 2023. As fixed mortgage rates rose, the cost of borrowing for homebuilders soared, making it difficult to fund new developments. However, the effects of these higher rates were partially mitigated by government policies aimed at encouraging the construction of rental housing, which remained more resilient.
Despite these challenges, CMHC noted that interest rate cuts in 2024 have begun to ease some of the pressure on housing starts. As the Bank of Canada gradually reduces rates, mortgage costs are expected to decline further, potentially reviving the pace of construction. Still, experts caution that the recovery in housing starts may be gradual, especially if other economic factors, such as high land and material costs, persist.
Ultimately, the 30,000-unit shortfall in 2023 has contributed to Canada’s ongoing housing crisis, exacerbating an already substantial gap between supply and demand. Experts argue that long-term solutions will require not only lower interest rates but also faster approval processes and policies that support construction through economic fluctuations.
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