Canadian Housing Starts Soar As Demand Implodes

In recent months, Canada’s housing market has been experiencing a paradox: housing starts are climbing to new heights, while demand for new homes is plummeting. According to data from the Canada Mortgage and Housing Corporation (CMHC), the seasonally adjusted annual rate (SAAR) of housing starts reached 283,700 units in June, marking a 0.4% increase from the previous month and the highest level seen since 2021. While these numbers might paint an optimistic picture, underlying trends tell a more complicated story.

The Resilience of Housing Starts Amid Declining Demand

Robert Kavcic, a senior economist at BMO, emphasizes the remarkable resilience of housing starts, especially given the recession-like conditions gripping several markets. In particular, Toronto has experienced a significant downturn, with new condominium sales “melting” to levels not seen in over 30 years. The data suggests that condo starts across major cities have decreased by approximately 30%. In Toronto alone, this figure exceeds 60%, largely due to the exodus of talent driven away by the soaring cost of living.

This seeming contradiction—rising housing construction amid declining sales—signals a pivot within the real estate market. As traditional homebuyers retreat, developers are increasingly focusing on creating rental properties instead.

A Shift Towards Rentals

The landscape of Canadian housing is undergoing notable shifts in policy and market demands. The recent uptick in housing starts is primarily driven by the development of rental apartments, rather than housing intended for ownership. This shift reflects a strategic move by policymakers, who have redirected stimulus efforts from assisting homebuyers towards benefiting institutional landlords.

Programs offering CMHC-backed loans and tailored financing options have made it more feasible for developers to invest in rental properties. “Rentals are fully filling the gap,” Kavcic notes, highlighting a broader pivot back to purpose-built rental construction. This adaptation is not only catering to immediate market demands but also laying the groundwork for long-term changes in the housing sector.

Record Highs in Rental Starts

As ownership demand continues to falter, rental starts in large urban centers are at record highs. While this adaptation sustains activity in construction and financing, it also raises significant concerns about the future of the rental market.

The current state of affairs indicates that while the construction industry remains busy, the long-term implications of an over-reliance on rental projects could be troubling. Many developers are shifting projects away from ownership to capture potential rental yields, further skewing the market dynamics.

The Looming Threat of Oversupply

Despite the apparent robustness of housing starts, the rental market is teetering on the edge of a potential bear market. Prices have only seen modest corrections thus far, retaining most of their prior increases. However, experts warn that the full impact of the supply surge is yet to be felt, coinciding with a slowdown in population growth.

Kavcic warns, “This [shift from condos to rentals] has cushioned the economic impact of a frozen ownership/condo market, but it also suggests that the bearish cycle for rents is still very young.”

Conclusion: A Complex Future Ahead

The seemingly strong housing start numbers mask a transition that is fraught with risk. Developers are redirecting their efforts towards rental properties, which may stave off an immediate downturn in construction but sets the stage for potential oversupply in the rental market as demand cools.

If rental prices decline, it could lead to a decrease in asset values, impacting not only the developers but also taxpayers who indirectly guarantee those investments. While these challenges may be deferred to future administrations, the need for a balanced and sustainable approach to housing in Canada is more critical than ever.

In conclusion, the Canadian housing market is at a crossroads. Policymakers and developers must navigate these uncertain waters carefully, with an eye toward long-term viability and broader economic implications.