Canadian Housing Starts Fell 11% in October as Groundbreaking Decreased
Canada Mortgage and Housing Corp. says the annual pace of housing starts slowed in October from its high for the year reached in September. The national housing agency says the seasonally adjusted annual rate of housing starts in October was 267,055 units, down 11% from 298,811 units in September.
The annual pace of urban starts was down 11% at 245,234 units in October as multi-unit urban starts fell 13% to 188,189 units. Urban starts of single-detached homes dropped 4% to 57,045 units. CMHC says the annual pace of starts was down in Toronto and Vancouver, however Montreal posted an increase. Rural starts were estimated at a seasonally adjusted annual rate of 21,821.
The six-month moving average of the monthly seasonally adjusted annual rate was 277,667 units in October, up 0.5% from 276,374 in September.
Canadian October Home Sales Up From September, First Monthly Increase Since February
Several real estate industry observers say the housing market isn’t roaring back, despite October delivering the first month-over-month uptick in home sales since February. Their outlook on the market comes as the Canadian Real Estate Association revealed that sales totalled 35,380 in October, a 1.3% increase from September, but a 36% drop from 2021.
“Tumbleweeds continued to blow across the Canadian housing market in October,” said Robert Kavcic, a senior economist with BMO Capital Markets, in a note to investors. Even though sales were up on a month-over-month basis in 60% of all local markets with Greater Vancouver up 6% alone, he pointed out that October’s activity remained below the low end of pre-COVID norms. It was even the quietest October for unit volumes since the economy was climbing out of a recession in 2010, Kavcic said.
Rishi Sondhi of TD Economics had a similar view. “Sales have already cratered by over 40% since February, are trending at levels last consistently seen in 2012, and appear to have undershot levels in line with fundamentals like income and housing supply,” Sondhi wrote, in a note to investors.
Sondhi and Kavcic attributed much of the slowness to interest and mortgage rates, which have been hiked in recent months to combat an inflation level not seen in decades. That’s weighed on consumer purchasing power and when combined with low levels of new listings, kept many buyers on the sidelines awaiting even further price drops.
Meanwhile, sellers are still refusing to list properties unless they have to move because they have realized prices aren’t as high as they were at the start of 2022. CREA found the number of seasonally-adjusted and newly-listed homes totalled 68,605, up 2.2% on a month-over-month basis in October. On a non-seasonally-adjusted basis, new listings hit 60,349, down 1.3% from October 2021.
“We have a unique situation where demand has cracked and buyers can’t qualify for, or afford, early-year prices,” said Kavcic. “But, outside some areas, there’s not a bounty of listings to choose from, and sellers are still able to say ‘no thanks’ and pull listings.”
Despite the lack of listings, the actual national average home price was $644,643 in October, down 9.9% from the same month in 2021. On a seasonally-adjusted basis, it reached $643,743, down 0.6% from September.
Cailey Heaps, president of the Heaps Estrin Real Estate Team in Toronto, said in the Greater Toronto Area she sees prices levelling off after their 10% fall from their pandemic peak. “The dropping market that we have seen since June has now stabilized,” said Heaps. “Maybe we will see a swing of a percentage or two in the coming year or so, but I don’t think we will see the same drastic decline in the central core of Toronto, but we might see it in the horseshoe that surrounds the city.”
Her theory was based on several of her listings netting multiple offers in October and buyers realizing that lower prices are still being offset by higher borrowing costs. “So typically the buyers that we see in today’s market are buyers who are upgrading and they’re taking advantage of the lower pricing or they’re buyers who aren’t sensitive to interest rates,” she said.
However, Kavcic and Sondhi agreed the downward price pressure will continue into 2023 because mortgage rates are pushing above 5% and more interest rate hikes could be looming.
Sondhi has forecast average home prices retracing about half of the gains made during the pandemic, but cautioned supply levels represent a key risk to TD’s predictions.
“With homeowners feeling the pinch of higher monthly payments due to rising interest rates, some may be forced into listing their properties (although so far, the level of new supply hitting the market each month remains subdued),” Sondhi wrote. “If a sufficiently large number of these homeowners end up listing their homes, it could downwardly pressure prices by more than we anticipate.”
Building Permits – September
The total value of building permits in Canada fell 17.5% in September to $10.2 billion, the largest recorded monthly decline. This was the first time all survey components posted monthly decreases since September 2019. Both the residential (-15.6% to $7.0 billion) and the non-residential (-21.5% to $3.2 billion) sector posted declines. On a constant dollar basis (2012=100), the total value of building permits dropped 17.8% to $6.0 billion.
Multi-family component drags down residential sector
The value of residential permits decreased 15.6% to $7.0 billion nationally in September, with a similar decline in the number of units (-16.0%) being built. The value of building permits in the multi-family component tumbled 21.2%. This drop was largely due to Ontario, which fell 39.6% following a record high in August. While August saw the submission of four permits valued at over $100 million in Ontario, including one for $480 million, there were no permits in September to break the $100 million mark.
Construction intentions in the single-family homes component declined 7.7%. Seven provinces posted decreases, with notable declines in Ontario (-7.0%), Manitoba (-35.1%), and Alberta (-15.9%).
Non-residential sector down across all components
The total permit value of the non-residential sector decreased 21.5% to $3.2 billion in September.
The institutional component, after three consecutive monthly increases, dropped 37.2% in the month. The value of building permits in the industrial component declined 23.4%, reaching the lowest point since late 2021 and has been on a downward trend since then.
Construction intentions in the commercial component fell 11.5%, with decreases posted in nine provinces. The two provinces to post gains were British Columbia (+37.9%), after three consecutive monthly declines, and Quebec (+22.3%), after posting the lowest value of the year in August.
Third quarter construction intentions slow down
The total value of building permits in the third quarter of 2022 decreased 6.3% to $33.7 billion after three consecutive quarterly increases.
The residential sector declined 5.6% in the quarter, with decreases posted in all provinces, returning the sector to historic levels following a strong second quarter. Single-family permits declined 9.0%, while multi-family permits were down 2.6%.
Overall, the number of new units slated for construction in the residential sector declined 7.4%. Much of the decrease stemmed from the multi-unit component (-7.8%) as it reached its lowest point since the third quarter of 2020. Single-family intentions saw a 6.2% decline.
The non-residential sector saw a 7.9% decrease to $10.8 billion, with declines in all components.
The industrial component (-19.3%) was the biggest drag on the sector, after reaching a new record high in the first quarter of 2022. The commercial component decreased 1.8% after six consecutive quarterly increases. The institutional component (-10.1%) continued to cool off after nearly hitting the $4 billion mark in the first quarter of 2022.
A recent online survey conducted by Royal LePage found that 19% Canadians are postponing purchasing a property due to the rising cost of living and higher interest rates. “We feel that those buyers are simply stepping back and seeing what’s going to happen in the market, reassessing their affordability and their financials to ensure that they get the property that they can afford, that they feel comfortable in, in terms of their monthly payments,” explained Royal LePage COO Karen Yolevski, as cited by CTV News.
How Canada’s New Immigration Targets Will Help Housing Recover — and Push Prices Higher Long-Term
A record number of immigrants are slated to arrive in Canada over the next three years, potentially lifting the housing market from its current slump by bolstering home prices long-term and labour shortages in the sector, economists say.But Canada’s already strained housing stock will struggle to keep pace with swelling demand.
On Nov. 1, the federal government announced its immigration plan, which will see Canada welcome 465,000 new permanent residents in 2023, 485,000 in 2024 and 500,000 in 2025. A revamped skilled-immigration system will help target candidates with the required skills and qualifications in sectors facing acute labour shortages — such as health care, manufacturing, building trades and STEM (science, technology, engineering and math).
Adding newcomers skilled in building and construction will help boost housing supply, said Robert Hogue, a senior economist with the Royal Bank of Canada. Ricardo Tranjan, senior researcher at the Canadian Centre for Policy Alternatives, agreed that immigration is necessary to generate economic growth, which can be done by building more homes. “Newcomers will support all aspects of the economy and construction is one of those sectors,” he said. “They will play an important role in the industry.”
Long-term, population growth also boosts home prices and values, which may help to bring the real estate market out of its slump, said Douglas Porter, chief economist and managing director of BMO Financial Group. Often, in regions that have strong population growth, home prices rise over time — increased demand raises home prices and pushes for more homes to be built. Because of that, people gain equity as housing values increase. In areas with weaker home prices, there is often little or no population growth, he added.
“Strong population growth is a positive for home prices,” Porter said. But in the near term, the housing market is still absorbing the Bank of Canada’s rapid interest rate hikes.
With the cost of borrowing spiking, most newcomers will likely rent upon arrival and try to purchase a home later on. (Skyrocketing rent prices could also make it difficult for newcomers to save to buy a home, Tranjan added.)
House prices are forecast to drop by at least 30% by spring of 2023 — offering some relief for newcomers who are able to purchase upon arrival. Yet the lower purchase price will be offset by high mortgage rates, said Avery Shenfeld, chief economist of CIBC World Markets. “Hopefully, cooler inflation will allow mortgage rates to ease in 2024, and open up a window that allows some now waiting on the sidelines to jump in,” he said.
While it’s unlikely the GTA and Vancouver will see prices drop drastically enough to ensure home ownership is affordable, it may force newcomers to locate to other parts of Canada that have historically seen less settlement, alleviating pressure from the country’s core urban centres, said RBC’s Hogue.
But pressure to ensure supply meets growing demand will mount, economists say. Record-levels of immigration will strain the limited housing stock in Canada — forcing all levels of government to push harder on building more housing supply.
On Oct. 25, Premier Doug Ford introduced sweeping legislation to build 1.5 million homes in 10 years across the province. Toronto will be expected to build 285,000 additional units by 2032. It’s a lofty goal to build on average 150,000 houses a year, since the largest number of annual housing starts since 1987 has been 100,000.
Canada’s National Housing Strategy also plans to invest $72 billion over 10 years to improve housing supply and repair existing units. Since its launch in 2017, the government has spent $26.5 billion to build 106,000 units and repair more than 254,600 units.
In the GTA, a record number of condo units were built in the third quarter of 2022 and new condos that started construction were up 45% year-over-year, a new Urbanation report found. This provides more rental units and opportunity for those looking to enter the real estate market.
“There has actually been record-levels of units being made in our most densely populated markets,” Porter said. In fact, lack of supply isn’t only to blame, he added. There has been outsized demand in the pandemic due to historically low interest rates, resulting in ballooning investor demand. Now that interest rates have risen quickly, investor demand has dampened, hopefully opening the doors for first-time home buyers and newcomers. “Once the froth is taken out of the market from investors it will offer relief to those who need housing the most,” Porter said.
Source: Toronto Star
Montreal Home Sales Hit Level Not Seen Since 2014: Quebec Housing Association
The Quebec Professional Association of Real Estate Brokers says October home sales in Montreal dropped to a level not seen since 2014. Sales for the month totalled 1,501, a 35% decrease from 2021, but in the single-family home category alone fell to a level not seen since 2000.
The association’s director of its market analysis department attributed the drop in sales to the increase in interest rates and inflation, which have both weighed on purchasing power. Charles Brant says the market is seeing a cautious attitude from people and investors who would make purchases but are instead waiting for the market to stabilize and conditions to be more favourable.
His association says the median price of a single-family home reached $510,000, a 1% drop from 2021, while the median price of a condo hit $380,000 and was relatively unchanged from last year. The median price in the duplex and triplex market was $700,000, which amounts to a $10,000 decline from October 2021 or a 1.4% decrease.
October’s new listings totalled 5,440, a 2% increase from October 2021.
Source: Toronto Star
Office Towers are Getting a New Lease on Life by Being Transformed into Housing
In 2021, the federal government announced that it would dedicate $300 million of $1.3 billion in broader housing initiatives to converting vacant commercial properties into 800 units of market rental housing. Ottawa has not yet provided information on funding details, access requirements or process.
But that hasn’t stopped cities such as Calgary, which had high vacancy rates long before the pandemic, from offering up incentives of their own. The city has contributed $73 million to support office-to-residential conversions from a pool of $100 million council earmarked for conversion projects last year as part of the Downtown Calgary Development Incentive Program.
So far, Calgary’s funding has been allocated to eight projects — five of which are currently under construction with three conditionally approved but unannounced by the city. The remaining $27 million is still up for grabs, according to Calgary’s downtown development and strategy manager, Natalie Marchut.
Conversions are a feel-good solution to the twin dilemmas of excess office space and a lack of affordable housing, but just how viable they are economically depends on the conditions in each market. In Calgary, downtown office vacancy rates sat at 29.7% in the final months of 2021, according to commercial real estate services firm Avison Young Inc., as the pandemic added to a hollowing out caused by the worst recession in Alberta’s modern history.
Elsewhere, vacancy rates are not as extreme, and investors may be more patient in waiting for demand to recover. In downtown Montreal, where the vacancy rate sat at 16.1% in the third quarter according to CBRE Group Inc., the most famous office conversion saw the Canada Life building, built in 1895, transformed into Le St-Regis lofts in 2021.
Downtown Vancouver boasted the lowest vacancy rate of Canada’s major cities at 7.1% according to CBRE. The city is yet to jump on the conversion trend since very few opportunities to do so exist.
Conversions in downtown Toronto, which posted a vacancy rate of 11.8% and 19% in its suburban areas in the third quarter, may never happen given the cost and market dynamics, industry watchers say. Toronto was one of the world’s tightest markets before the pandemic, with a commercial building vacancy rate of 1.9% in 2019. That figure grew to 5.9% in 2020 and then to 9.5% in 2021, according to data from Cushman & Wakefield PLC. Toronto also has 30 buildings amounting to 8 million square feet of downtown office space under construction.
Premium office towers, however, aren’t the best candidates for redevelopment. A recent report by Avison Young said commercial rents have fallen in recent years, and because of this, many tenants are moving to higher-quality office buildings from older, less desirable properties. These C and B class commercial buildings are the best candidates for developers willing and able to take on the task of converting the spaces into housing.
Maxim Olshevsky, managing director of Peoplefirst, said that purchasing a commercial building in Toronto is far more expensive than doing so in Calgary or Montreal and that doesn’t take into account the challenges the construction process can pose. Some buildings have post tension cables within the floor slabs, and new designs must work around every single post tension cable, he said. Another challenge is plumbing, since office buildings don’t have sufficient plumbing to support housing units, and a developer would have to account for that when adding in kitchens and washrooms, among other things.
The rising prices of materials and labour has been quite formidable, too. “It’s no secret that at this moment, inflation is driving everything. And, of course, construction is not exempt from that. So, for us it is important to maintain the quality that we want to have but still fitting it into an established budget.” Olshevsky said. “It would be almost impossible without the city support on the ground.”
One of the major benefits of conversions for housing markets starved for inventory is that conversions can be ready for market in less than half the time of a traditional new build — which typically takes three to four years from start to finish.
Source: Financial Post