Canada: Housing Starts Stay High Against All Odds

First and foremost, today’s data alone do not change our view that Canada's central bank will hold its policy rate at 5% in its October meeting. Construction activity is trending lower, which suggests that sharply higher borrowing costs have helped to cool down economic growth in interest rate-sensitive areas.

However, despite the construction slowdown in August, starts continue to prove resilient to higher rates, construction industry labour shortages, weak homebuilder sentiment, and elevated material costs. Historically, we’ve observed co-movement in home purchases—which have fallen significantly since the Bank of Canada began this tightening cycle early last year—and housing starts. Yet at more than 250k annualized units, new construction remains very high relative to historical levels, albeit still not high enough to keep up with population growth.

Volatility in regional building trends continued, and that has many implications for provincial growth forecasts. Ontario starts have now fallen by nearly one-third in two months (though they remain high), driven by declines in the multi-unit space. With the outsized weakness in home sales observed in and around Toronto External link. This link will open in a new window. since rate hikes resumed in June, this points to a more pronounced slowdown in Q3 2023 in Canada’s largest province. That said, we still don’t see affordability returning to Canada’s largest local housing market External link. This link will open in a new window. anytime soon. Meanwhile, Quebec and Alberta—previously laggards in homebuilding—recorded their strongest levels of new construction since late last year. That said, both provinces continue to report inventories well below levels recorded in the five years before the pandemic, which does not bode well for affordability going forward.

Looking ahead, recent funding and policy announcements by the federal government should provide a modest tailwind to home building in Canada. These include the Housing Accelerator Fund and However, as we highlighted in a recent report External link. This link will open in a new window. on policies to boost the housing supply in Canada, none of these is a panacea.