Canadian housing starts have held their own despite the substantial changes to provincial and federal government housing policy since October of last year. Builders broke ground on roughly 222k (SAAR) homes in July, up 4% from last month and holding the six-month moving trend at 218k.
The gain in July was largely concentrated in multifamily units, which combined were up 9% in July. On the other hand, single-detached starts fell 4% in the month, but were still holding near a 77k units – a levels still well above the average of the last three years.
The Atlantic Regions posted the strongest gains in July led by a near doubling in Nova Scotia, but construction in these regions can be highly volatile on a month-to-month basis. In unit terms, BC (+20%) and Alberta (+8%) contributed the most to July’s gain. New housing construction in Ontario has eased from a record pace set in January, but is up on the month and still holding near a healthy 76k.
Key Implications
Given the lag between a new home sale and groundbreaking, it would appear that the strength in housing starts over the first six months of 2017 is largely due to past strength in housing demand. At this point, existing home sales have fallen for three consecutive months, starting what we believe to be a soft landing in Canada’s housing market. The slowdown in the existing home market is likely to lead to a softer pace of construction activity in the second half of the year, particularly given mortgage rates are rising.
In light of falling demand, the current rapid pace of construction activity is somewhat concerning as far as implications for future housing supply. Housing starts are running well above estimates of household formation (150k per year from the 2016 Census data), particularly in BC and Ontario. Housing starts in BC were twice the estimated pace of household formation, while they were 20k above household formation in Ontario. While some of these units merely offset the decline in housing stock due to depreciation, as they reach completion (and they are starting to in BC), the additional supply should put downward pressure on prices.
Overall, we look for housing starts to gradually grind lower, trending to under 200k later this year and dipping to below 180k next year as the cool-off in the existing home market spreads to new construction activity.
