Late last year, a series of aggressive rate hikes were introduced as a response to the inflation in Canada. This brought the Bank of Canada’s interest rates from an effective lower bound of 0.25% all the way to 3.25%. As a result, the construction industry and the housing mortgage landscape have been heavily affected.
Additionally, the upsurge in interest rates can create an environment in which insurance companies may need to adjust their policies and claims management practices to reflect the increased risk posed by the changing market conditions.
So, what does this mean for home builders and developers? To what extent will this affect home builders’ insurance and the industry as a whole? Keep reading to find out!
The Future Is Rocky for the Construction Industry
The Canadian Home Builders’ Association (CHBA)’s Housing Market Index (HMI) has shared how the rising interest rates—on top of the ongoing challenge of sourcing skilled trades professionals—were impacting builder confidence.
According to the CHBA HMI, the rate hikes added to the problem of continuing supply chain issues and labour shortages. This has resulted in home completion delays, which increases construction costs and drives away prospective homeowners as many end up changing their minds about buying new homes.
Based on a survey involving residential builders and developers, it was revealed that 50% of respondents said that the increased rates lessened traffic of prospective buyers, 45% shared that buyers are delaying purchases, and 38% have changed their minds about their purchases entirely.
Who Is Impacted the Most?
Inflation continues to impact the construction industry’s growth. Stakeholders such as contractors and developers are among those negatively affected by the increased interest rates—and this contributes to the shortage or rapid decline of skilled trade workers.
According to data provided by the Canadian Survey on Business Conditions last year, one-third of businesses said that recruiting skilled workers was an obstacle to the industry’s growth. And this is further backed by the fact that skilled tradespeople are in demand, but due to the stigma and other factors surrounding skilled trades, it’s become more difficult to entice people to take up trades.
In addition, 72% of the contractors who responded said they expect inflation to put pressure on contractors further.
Rates of inflation also affect the cost of essential materials, such as lumber, steel, and more. The rise in prices of these materials makes it harder for skilled trade workers to secure the tools and equipment they need for a construction project.
With construction costs rising and the number of projects getting delayed as well, residential property developers will undoubtedly feel the effects of rising interest rates. This will likely ripple through the surety industry as developers continue to lean more toward their surety brokers to release deposit funds into projects.
In summary, contractors and developers face more challenges in securing funding for projects amidst questions about the bankability of said projects. When inflation is high, funders will generally be more cautious when offering financial support to projects that are high in value, complex, or have long build times.
Rising Interest Rates and the Insurance Industry
An increase in interest rates can have a significant impact on the insurance industry as well. Specifically, higher interest rates can:
- Make it more expensive for home builders to borrow money, which can slow down new construction and renovation projects. This can lead to a decline in demand for home builder insurance and lower premiums for insurance companies.
- Increase the cost of materials, labour, and other expenses for home builders. This can make it more difficult for home builders to maintain their profit margins and increase the risk of losses for insurance companies.
- Impact the affordability of housing for potential homebuyers. This can further affect the demand for home builder insurance, as well as the insurance companies that provide it.
- Result in insurance companies adjusting their policies, pricing, and claims management practices to reflect the increased risk posed by rising interest rates. This could lead to higher premiums for home builders and potentially impact their ability to secure insurance coverage.
That last point is particularly interesting because it can have other implications for the home building industry, namely:
- Rising interest rates could result in changes to the types of coverage that are available to home builders and could also lead to more stringent requirements for obtaining insurance policies as a whole.
- Insurance providers may also increase their investigation of home builders and the projects they are involved in to ensure that they comply with the necessary regulations and are able to fulfill any financial obligations. This could lead to more extensive background checks, audits, and other due diligence measures.
A Possible Solution: CMHC’s Mortgage Loan Insurance Program
The Canada Mortgage and Housing Corporation (CMHC) launched a new mortgage loan insurance program in early 2022, which allows developers to obtain mortgages with more reasonable rates and financial terms.
In exchange, housing projects must set aside a portion of units as affordable housing. Project developers must also abide by more stringent energy efficiency and accessibility requirements.
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