Canada: Starts and Sales Remain a House Divided, and Affordability Will Suffer

To the ongoing question of whether home building would experience the kind of downturn seen in the resale market, July’s answer was: “not quite.” Historically, we’ve observed co-movement in home purchases and new construction (graph), but the data continue to send mixed messages on this front. On the one hand, July’s decline maintains a trend of gentle easing in total housing starts. On the other, aggregate new construction remains very high relative to historical levels. Going forward, we do expect a more significant slowdown, consistent with construction industry labour shortages, high borrowing and material costs, weak homebuilder sentiment, and expectations of softening economic activity.

The Bank of Canada will likely take some comfort in the sales and starts weakness documented this week, particularly after recent cooling in GDP, employment, trade, and core inflation. Combined, these more downcast indicators suggest the painful medicine of higher interest rates is working to cool down economic growth and bring price pressures to heel. Accordingly, we still expect the central bank to hold its policy rate at 5% in its September meeting.

Notably, building trends by region and unit type aren’t conducive to improving affordability. For one thing, the resilience in starts so far in 2023 has been helped by robust multi-unit construction in Ontario and BC. That doesn’t necessarily mean affordable new supply in these high-priced provinces: our work highlighted a trend towards investment properties that are more expensive on a per-square foot basis. In contrast, the so-called “missing middle” remains largely absent from new home construction. Meanwhile, declining starts elsewhere in the country more directly point to constrained supply down the road. Quebec and the oil-producing provinces—so far relatively unscathed by the latest interest rate hikes—are now reporting inventories well below levels recorded in the five years before the pandemic.