Housing starts in Canada fell to 273,800 in May, a 3% drop from April, according to data released by the Canadian Mortgage and Housing Corporation on Monday.
Although housing starts are still much higher than during the pre-pandemic era, the slight decline might be a preview of the construction industry in the months ahead.
The decline was spread across all types of housing: urban areas single units (down by 4%), urban areas multiple housing (down by 2%), and rural area housing (down by 7%). Major urban areas including Toronto, Vancouver and Montreal all saw increases in housing starts, driven by large multi-unit complexes.
The June data does not yet reflect the Bank of Canada’s striking 100 basis-point hike in its policy rate last week. With that, we expect construction to cool in coming months as the industry grapples not only with rising costs and supply chain disruptions, but also with rising interest rates that put certain financing options out of reach.
Already, projects have been canceled or delayed, some in the middle of construction. Projects with healthy margins and buffers will go ahead as planned, while some projects that were approved in the midst of the below-zero real interest rate boom in early 2020 to 2021 will not.
This threatens to worsen the housing shortage. For more than a decade, Canada has been underbuilding, resulting in a chronic shortage that has played a part in sky-high housing prices and an affordable housing crisis.
Added to the mix is the entry of millennials into the market and hundreds of thousands of incoming immigrants, all of whom will further strengthen the demand for housing.
So far, construction has remained strong. But if economic headwinds prove too strong and dampen construction, then the government’s promise of doubling the number of homes built over the coming decade would be on shaky ground.
