Following November’s surge, Canadian housing starts pulled back to 217k (SAAR) in December. The underlying trend remains firm however, with the 6-month moving average at a healthy 227k.
Multifamily starts dropped by 22% in the month, while single-detached starts advanced by 5% in urban areas.
December’s drop was largely driven by Ontario, where starts fell 33k to a relatively modest 66k. However, starts were also lower in Alberta (-11k to 23k units) and PEI. On the opposite end of the spectrum, starts were higher in the other 7 provinces, paced by B.C. (+5k to 52k units).
In Toronto, starts declined by 19k to 26k during the month. However, the pace of new home construction in Toronto was almost unchanged in 2017 compared to the year prior. Homebuilding was solid in Montreal in December, with starts increasing by 15k to 40k. Meanwhile, starts crept higher in Vancouver, totalling 34k (compared to 31k in November).
In 2017, starts came in at 221k, up 11% from 2016 and marking the highest level in over a decade. 2017 was a solid year for multi-unit starts, with hefty gains in Quebec, Ontario, Alberta and Manitoba. Construction of single-detached units also increased in 2017, though at a more subdued rate.
Key Implications
Homebuilding pulled back in December, consistent with the narrative of softer permit issuance in recent months. That said, the pace was still solid and held above the rate of household formation. Starts were strong in 2017 overall, backed by economic strength, low interest rates and population growth, with increased construction in both the single-detached and multi-unit markets.
During the fourth quarter the level of starts was about 3% above its third quarter average, bolstering our expectation that residential construction will make a positive contribution to GDP growth during the quarter.
The modest decline in new home construction in December falls in-line with our view that softening economic growth, tighter lending conditions and higher mortgage rates will slow starts activity during 2018. Notably, the updated B20 guidelines were initiated on January 1st and the Bank of Canada is expected to hike their policy rate on January 17th – the third hike in six months.
All in all, a solid pace of starts in 2017 has helped lead to an elevated level of homes under construction, indicating significant housing supply in the pipeline. As these units reach completion, some downward pressure should materialize on prices in coming years.
