Canadian Housing Starts Show Signs of Slowing Momentum Amidst Robust Demand

Recently released data from the Canada Mortgage and Housing Corporation (CMHC) indicates a notable decrease in housing starts across the country. Although housing starts continue to display robust levels, the figures for September reflect a significant drop, raising concerns about the sustainability of the current market conditions. According to BMO, this slowdown is contrary to ongoing efforts by policymakers aiming to triple new home starts; however, experts caution that such ambitious goals were unrealistic from the outset.

A Closer Look at the Numbers

In September, Canada recorded 18,800 housing starts, a stark 15% decline compared to the same month last year. While the six-month trend still reflects a slight rise of 1.3%, totaling 244,000 units, this marks a deceleration from the previous report, which saw a 1.6% increase. Despite this slowdown, it’s essential to acknowledge that these starts remain significantly above historical averages.

Robert Kavcic, a senior economist at BMO, stated, "Canadian housing starts edged up to 224,000 annualized units in September, but activity continues to gradually grind softer." He points out that while the 12-month average for new starts has declined, the overall activity level remains strong by historical standards. Still, it is a long way from the ambitious targets set by policymakers.

The Factors Behind the Slowdown

The decline in new home construction during a period marked by rapid population growth is perplexing. The core issue lies in the imbalance of demand. Despite an increase in potential buyers, many are priced out of the market due to escalating costs. Several factors contribute to this phenomenon, including:

1. Rising Interest Rates: Increased borrowing costs are making it challenging for prospective homeowners to enter the market.

2. Soaring Material Costs: The price of construction materials has surged, further straining builders who are already working with tight margins.

3. High Development Fees: These expenses add another layer of financial burden, limiting the capacity of developers to lower sale prices.

As Kavcic notes, “Market conditions are making it tough for builders, with higher borrowing costs and, importantly, the disappearance of investors that are often leaned on to bring projects to the construction phase.”

Impact of Investor Activity

Investors play a pivotal role in the Canadian housing landscape, making up over 70% of pre-construction demand in major urban centers. Traditionally, these buyers have benefitted from significant leverage, propelling prices higher through competitive bidding against end-users. However, as investment returns have diminished, this buyer demographic has shifted, leaving many end-users unable to afford homes.

Despite the slowing momentum, overall building activity remains unusually high. The 12-month average for multi-unit starts has stabilized around 180,000 since the tightening cycle commenced. This stability can primarily be attributed to an uptick in purpose-built rental units, countering the dwindling demand from traditional investors.

Government Interventions and Long-Term Effects

In light of the issues facing the housing market, government interventions have played a crucial role. Authorities have invested taxpayer funds to incentivize ongoing development through measures such as:

• State-backed multi-generational development loans.
• Modified high-ratio, extended repayment terms tailored for first-time buyers, now also accessible to investors.

While these measures aim to stimulate building activity, they have paradoxically led to increased construction costs, creating a drag on supply while working to prevent price declines. Critics argue that these interventions have inadvertently perpetuated market inefficiencies, complicating the housing landscape further.

Conclusion

As Canada navigates a complex housing market characterized by ambitious policy goals and a challenging economic environment, the latest data points to a slowing in new housing starts amid persistent population growth. While the build rates are still elevated compared to historical standards, the interplay between rising costs, interest rates, and shifting investor dynamics presents significant challenges. Addressing these issues will require a careful balance of policy and market interventions to ensure that housing remains accessible and affordable for all Canadians.