Canada: Against All Odds, Housing Starts Stay High

Another month, another upside surprise for Canada’s almost unbelievably resilient residential construction sector. The October reading was the best since June and the second strongest over the past year, pushing the 12-month moving average higher (graph 1). The multiple-unit segment dominated, but single-detached starts reached an eight-month high.

Much as homebuilding has consistently beat expectations since rate hikes began to weigh down the resale home market, we just don’t see how that can continue. Other than the population boom currently underway across much of the country, there aren’t any indicators that suggest conditions supportive of homebuilding. Interest rates and building material costs are at decades-high levels. Sentiment in the homebuilding sector is very weak. Labour shortages remain in the construction industry. The historical relationship between sales and starts appears to have broken down of late (graph 2). However, a particularly sharp drop in home purchases witnessed in the same month as this starts’ surge also doesn’t bode well for homebuilding going forward. With all these trends likely to persist to at least some degree over the next few years, and economic activity set to retreat as we approach next year, we see housing starts falling back next year.

Recent regional building trends continued, offering some implications for provincial growth forecasts. Ontario and BC starts remained robust. Accordingly, better-than-expected homebuilding in late 2023 may help mitigate the effects of the drag on residential investment from their particularly weak resale markets since the Bank of Canada resumed hiking rates in June. Alberta starts slowed but remained high relative to recent history, providing some late-year momentum to that province’s economy as well.

As surprising as the residential construction data continue to be, the October starts print doesn’t change things for the Bank of Canada. Although homebuilding activity continues to prove resilient to the effects of high interest rates and a slowing economy, we think the Bank will put more weight on the recent deceleration in employment and inflation. Consequently, today’s data alone do not change our view that the central bank will hold its policy rate constant at its next meeting, with the next move likely to be a cut towards the middle of 2024.