Rising interest rates influence housing developers and homebuyers

Growth in residential construction was mixed across Canada’s six largest CMAs in 2022, as housing starts increased in Toronto, Calgary, Edmonton and Ottawa, remained unchanged in Vancouver, and decreased in Montréal,  according to the latest edition of Canada Mortgage and Housing Corporation’s (CMHC) Housing Supply Report (HSR), which examines new housing construction trends in Canada’s six largest CMAs.

Significant increases in interest rates influenced the activities of both developers and homebuyers as 2022 progressed. The full impact of the increase in interest rates is not yet reflected in the CMHC Housing Starts and Completions Survey, which measures the pace of construction of new residential housing in Canada, said the federal agency on Wednesday.

“In some centres, seasonally adjusted housing starts began moving lower at the end of 2022 and early 2023. The higher interest rate environment will likely slow construction activity in more centres in 2023,” said Francis Cortellino, Senior Specialist for housing market analysis at CMHC.

“Some projects may become unviable at current financing rates, or construction financing will become harder to obtain,” said Eric Bond, Senior Specialist for housing market analysis at CMHC.

• Growth in residential construction was mixed across Canada’s six largest CMAs in 2022. Housing starts increased in Toronto, Calgary, Edmonton andOttawa, remained unchanged in Vancouver, and decreased in Montréal.

• Significant increases in interest rates influenced the activities of both developers and homebuyers as the year progressed. The full impact of the increase in interest rates is not yet reflected in our housing starts statistics.

• Even with elevated housing construction in some CMAs during the pandemic, inventories of new and unabsorbed homeownership units, which is a housing unit that has been completed but not yet sold, are currently at historic lows. Because of the resulting limited options on the market, households in large CMAs may find it harder to access housing that meets their needs.

• In 2022, housing starts in Toronto rose 7.7% to reach their highest level since 2012. The increase was driven by higher condominium apartment construction resulting from strong presales over the past two years (presales are an important source of financing for condominium apartment construction). In contrast, total starts declined 25.3% in Montréal to return to recent average levels following record starts in 2021.

• Low vacancy rates and rising rents in 2022 increased developer interest in the rental segment across all CMAs except Toronto. InVancouver, a decline in condominium construction was offset by a surge in rental starts.

• In Edmonton, new purpose-built rental apartment construction increased significantly in 2022. The increase was spurred by projects concentrated near the downtown core and in newly developing neighbourhoods on the periphery.

• In Calgary, construction of both purpose-built rental and condominium apartments increased significantly in 2022, with projects concentrated near the downtown core and in newly developing neighbourhoods.
• For 2022, residential construction set a new record in Ottawa, as densification continued. 2022 was the first time in more than 20 years that the share of apartment starts accounted for more than 50% of total housing starts in the region. Construction activity was concentrated in the central sectors, where larger and larger buildings are being built.

Another report released Wednesday by the CMHC  said the standalone monthly seasonally adjusted annual rate (SAAR) of total housing starts for all areas in Canada declined 11% in March (213,865 units) compared to February (240,927 units). The monthly SAAR of total urban starts (centres 10,000 population and over) declined 12%, with 192,545 units recorded in March. Multi-unit urban starts increased 11% to 151,769 units, while single-detached urban starts decreased 16% to 40,776 units.

Among the Vancouver, Toronto, and Montreal CMAs, only Vancouver recorded an increase in total SAAR housing starts in March, up 98% due to more than twice as many multi-unit starts compared to February. Montreal declined 12% and Toronto declined 26%, it said, adding the rural starts monthly SAAR estimate was 21,320 units.

The trend in housing starts was 240,669 units in March, down 6% from 254,658 units in February. The trend measure is a six-month moving average of the monthly SAAR of total housing starts for all areas in Canada, said the CMHC.

Bob Dugan

“Despite the national decline in March, the SAAR of housing starts and the trend appear to be returning to pre-pandemic levels. With interest rates remaining high, it continues to be challenging for developers and homebuilders to get projects started. We will need to find innovative ways to deliver more housing supply to keep up with demand and ultimately improve affordability,” said Bob Dugan, CMHC’s Chief Economist.

Andrew Grantham, an economist with CIBC Economics, said just as population growth is accelerating and demand for housing is rising, homebuilding appears to be slowing under the weight of higher interest rates.

“The 214K annualized housing starts in March was down from 241K in the prior month and well below the 237K expected by the consensus. The 6-month average pace of 241K is the slowest since late 2020. The deceleration in starts was equally split between singles and multiples, and was reasonably broad-based across the country, suggesting little reason to expect a big bounce back next month. Weakening homebuilding will ensure that residential investment remains a drag on GDP, even as resale activity has stabilized,” he said.

Rishi Sondhi, Economist with TD Economics, said housing starts continue to cool, consistent with its view (see forecast).

“However, March may have been impacted by early-month winter storms across parts of the country. That said, the scale of retrenchment has been steeper-than-anticipated in the first quarter, as multi-family and single-detached units both moved lower. The downtrend in building permits to roughly pre-pandemic levels points to this lower level of activity being maintained over the near-term,” said Sondhi.

“Starts finished the quarter down 14% quarter-on-quarter which, alongside the quarterly drop in resale activity, will weigh on Q1 real GDP growth through softer residential investment.”

Robert Kavcic, Senior Economist with BMO Economics, said: “Make no mistake, we are still seeing a historically robust level of activity, but the downward turn is going to confound policymakers that have been pushing for a doubling of output. As we’ve argued since the day Budget 2022 was tabled, doubling residential construction would be next to impossible given the industry is already running at full capacity, and Canada is already building more units per capita than it ever has. To double output from this lofty starting point is, let’s just say, a bit of a fantasy. Now, with market conditions turning since the Bank of Canada began raising interest rates, investors shying away from the market, and pre-construction sales reportedly quiet, builders appear to be backing off somewhat.

“Despite that, we continue to see a floor for residential construction not too far from recent more subdued levels given relentless population growth and millennial household formation. In fact, if construction slows as we are now seeing signs of, we could come out other side of this cycle fighting many of the same problems—tight supply relative to demographic growth; and a mix of housing (lots of condos but few singles) that is not matching demographic needs.”

(Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He worked for 35 years at the Calgary Herald, covering sports, crime, politics, health, faith, city and breaking news, and business. He works as well as a freelance writer for several national publications and as a consultant in communications and media relations/training. Mario was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list)