Cedar is a very popular wood for dog houses for a number of reasons: The oil in cedar is a natural deterrent to fleas, ticks and termites, the wood is very decay resistant, it does not require painting (assuming you don't mind the rustic gray look), it smells nice, it's fairly strong yet lightweight, and it is inexpensive. What more could a dog or a dog owner want? Cedar chips also work quite well as a bedding material for dogs.
Many cedar dog houses use conventional construction lumber (spruce, hemlock, fir, pine) for the framing. Solid cedar boards are then used for the siding, roof, external trim, and interior panels. An advantage of a cedar roof is that it reduces the solar heat build-up compared to asphalt shingles. It also makes for a much lighter roof, allowing the roof to easily be removed for cleaning or otherwise accessing the interior of the dog house.
There is more than one species of cedar wood so know what kind you are getting when you purchase a cedar dog house. Western Red Cedar is considered by many to be the best species for a dog house. Superior rot resistance, minimal warping, and large knot-free boards are some of the hallmarks of this wood.