Annual Pace of Housing Starts in Canada Rose 8% in September
Canada Mortgage and Housing Corp. reported an 8% increase in the annual pace of housing starts in September, reaching 270,466 units, up from 250,383 in August. This increase was attributed to a 9% increase in urban housing starts, a 10% increase in multi-unit urban starts, and a 3% increase in single-detached urban starts.
The annual rate of rural starts was estimated at 19,700 units. The six-month moving average of the monthly seasonally adjusted annual rate of housing starts in September was 254,006, up 3.9% from 244,511 in August.
Housing Starts in Canada’s Major Cities: A Mid-2023 Overview
The first half of 2023 has unveiled shifts and trends in housing starts within Canada’s 6 largest census metropolitan areas (CMAs), according to the Housing Supply Report. Housing supply in Canada’s biggest cities grew by only 1% in the first half of 2023, compared to the same period in 2022.
Factors such as stricter borrowing rules, higher construction and labour costs and increased interest rates posed challenges for developers in all 6 major markets. Additionally, construction times slightly extended by 0.9 months compared to the first half of 2022.
Toronto and Vancouver dominated housing starts, mostly in apartments, making up 66% of new units breaking ground. Meanwhile, other large Canadian cities saw declines in housing starts.
Montréal experienced its most significant decline in residential construction in 26 years. Unlike Toronto and Vancouver, Montréal tends to prioritize small and low-rise apartment structures. These smaller projects require less time for planning and construction. The drop in housing starts in Montréal was, therefore, more reflective of the recent deterioration in financial conditions.
Meanwhile, many apartment projects started in the first half of 2023 in Toronto and Vancouver were financed when macroeconomic and financial conditions were more favourable. As such, elevated construction activity in these cities is not likely to be sustainable due to the various challenges currently facing developers.
“Given larger building size and resulting longer preparation time of the buildings started in Toronto and Vancouver, the numbers posted in these cities are the result of a process that began at a time when financing and building conditions were considerably more favourable. This contrasts with Montréal, which is more reflective of the current, more challenging, context, such as higher financing and construction costs.”
— Kevin Hughes, Deputy Chief Economist for the CMHC
For further insights and to watch Kevin Hughes, CMHC’s deputy chief economist, discuss the report’s findings, visit the CMHC website.
Canadian Home Sales Ease Again in September
Canadian home sales fell for a third straight month in September and Canadian Real Estate Association (CREA) downgraded its forecast for the full year, anticipating that interest rates will stay at elevated levels for longer than previously thought.
CREA expects that sales will decline 9.8% this year from 2022 to 449,614 properties, compared with a 6.8% decline expected in July, mostly down to fewer expected sales in Ontario and British Columbia. The forecast for the national average home price was also downgraded, with CREA expecting an annual decline of 3.3% to C$680,686 ($497,614).
Weaker sales and pricing trends since the summer, along with “softer market conditions going forward and ‘higher for longer’ interest rates,” weighed on the forecast, CREA said in a statement. The Bank of Canada left its policy rate on hold in September after lifting it in July to a 22-year high of 5%. Money markets are leaning toward one more tightening over the coming months.
Data from CREA showed that Canadian home sales fell 1.9% in September from August, the third consecutive month of declines, and were up 1.9% on an annual basis. The industry group’s Home Price Index edged down 0.3% on the month and was up 1.1% annually, while the national average selling price was up 2.5% on the year.
“The recent trend of slowing sales and rising new listings continued in September,” said Larry Cerqua, chair of CREA. “This presents an opportunity for buyers, although many of them seem content to stick to the sidelines until there’s more evidence that interest rates are indeed finally at the top.”
“Resale housing markets have settled down pretty quickly following this spring’s brief and somewhat surprising rebound in sales and prices,” said Shaun Cathcart, CREA’s senior economist. “With the inventory of homes for sale still historically low amid huge demand for housing in Canada, what happens next will depend on interest rates. Whether that means uncertainty about the possibility of further hikes, or just the cost of borrowing money right now, neither of these will be resolved for would-be buyers anytime soon. As such, expect a quieter than normal winter with all eyes on the Bank of Canada. We’ll see how buyers are feeling when the snow starts to melt.”
The number of newly listed homes jumped 6.3% on a month-over-month basis in September, making for a cumulative gain of about 35% from the 20-year low reached back in March. New listings are trending near average levels now.
Statistics Canada Reports Value of Building Permits up 3.4% In August
Statistics Canada says the total monthly value of building permits in Canada rose 3.4% in August to $11.9-billion, as gains in the non-residential sector offset modest declines in residential construction plans. On a constant dollar basis, the total value of building permits was up 4.3% in August.
The agency says the total monthly value of non-residential permits rose 14.8% to $5.0-billion in August. The increase came as permits were issued for hospital renovations in Toronto and North Vancouver, B.C., a new university building in Kelowna, B.C., a new correctional facility in Thunder Bay, Ont., and a new arena in Whitby, Ont.
On the residential side, the total monthly value of permits issued fell 3.7% to $6.8-billion in August as the value for permits for multi-unit construction intentions fell 9.5% to $3.9-billion. However, the value of single-family home permits rose 5.5% to $2.9-billion in August, marking the fourth consecutive monthly increase.
Forces Are Gathering against Canada’s Housing Market
More headwinds are barrelling down on Canada’s housing market. Sales in most major markets weakened in September amid a surge in new listings and softer demand, and now mortgage rates are on the march amid the global bond market rout.
Canadian government bond yields have risen to their highest since the financial crisis in recent days, and this rise could pose a big risk to the economy through its impact on the housing market, said Stephen Brown, deputy chief North America economist for Capital Economics.
During the week of October 2, five-year bond yields rose to 4.4%. As bond yields lead fixed mortgage rates, the increase implies that the lowest available five-year fixed rate could rise to 6.25%, Brown said. That’s a 150-basis point increase since April, which Brown says is equivalent to a hit to affordability of about 13%.
Rising mortgage rates will put more buyers on the sidelines, but even before the home price outlook had deteriorated more than Capital economists had expected. Local real estate board data show a surge of new listings with fewer buyers in September, putting the average sales-to-new listing ratio across Canada’s largest cities lower than the trough in 2022, when prices were falling, said Brown.
Capital’s current forecast for Canada’s housing market is that prices will stagnate over the next six months, “but, given recent developments, it now seems more likely that they will decline,” said Brown.
Toronto-Dominion Bank economists also see a “more pronounced and extended downturn” for the housing market than they envisioned in June because of rising bond yields. They now see home sales and prices falling in the last quarter of this year and into 2024. By the first quarter of next year, they expect sales and prices will have declined by 8% and 6%, respectively, from where they were in the second quarter of 2023, said TD economist Rishi Sondhi.
Homebuyers might get some mortgage relief if Canadian bond yields start to edge down by the end of this year as the economy softens and market bets on Bank of Canada interest rate cuts increase, he said. But the housing market’s recovery won’t be quick. “We suspect that it will take until 2025 for Canadian home sales to sustainably surpass their pre-pandemic level,” Sondhi said.
Source: Financial Post