Canadian housing starts balked under under the pressure of interest rates last month, new data from the Canada Mortgage and Housing Corporation shows. CMHC reported on Tuesday that the total monthly seasonally adjusted annual rate of starts slipped 9% in June over May to just 241,672 units.
This is in stark contrast to the 10% increase in starts from April to May, essentially wiping out those gains, and is right in line with CMHC’s housing market outlook from April, which predicted that “housing starts will decline in 2024, continuing the decline from the record high levels of 2021.”
Across urban centres — characterized as those with populations of at least 10,000 — starts dropped off 13% year over year, CMHC said, adding that “the year-over-year decrease was driven by lower multi-unit starts, down 16%, while single-detached starts were similar to last June.”
The data gets more dismal at a more granular level. According to CMHC, starts in two of the country’s major markets were “markedly lower,” with activity dropping off 60% in Toronto and 55% in Vancouver in the month. Meanwhile, both recorded “significant” declines in multi-unit construction.
Montreal ended up being an outlier, as far as major urban centres are concerned, with a 226% jump in starts recorded due to increased multi-unit activity. “Also of note is the higher construction activity in Calgary and Edmonton as starts increased across all dwelling types, driving total starts up 38% and 67% respectively.”
According to CMHC’s Chief Economist Bob Dugan, “the higher interest rates environment appears to have caught up with some of Canada’s major centres,” and it was that activity — or lack thereof — that dragged the national metrics down.
TD Economist Marc Ercolao additionally pointed to “weak pre-sale activity in key markets and elevated input costs” as reasons for why starts will continue to trend lower as 2024 progresses, in commentary on CMHC’s data from Tuesday.
Speaking to the pre-sale piece, and taking a closer look at one of those key markets, the Greater Toronto and Hamilton Area has seen pre-construction sales downtrend sharply over the past two years, according to Q1 data from research and consultancy firm Urbanation.
The firm reported in April that developers that stayed locked in on their pre-construction projects in the first quarter of 2024 were met with tepid results. In fact, just 50% of the pre-construction projects across the region were pre-sold in the quarter, down from a 61% average absorption level a year ago and 85% two years earlier.
Second quarter research is due in the coming days, Urbanation tells STOREYS, but there’s little indication that pre-sales will pick up any time soon. For those with the ability to create new housing, sagging market sentiment, coupled with the elevated costs of doing business, as Ercolao alluded to, there isn't much incentive to get back in the building game.
But wait, interest rates are coming down, and that’s good news for Canadian building, right? Well, yes and no. Lower interest rates combined with milder construction cost growth and more government support are anticipated to be critical to what CMHC coined in their April forecast as a “partial rebound” in housing starts — but even that isn’t anticipated until 2025, or maybe even 2026.
Nonetheless, if we’re looking to lower rates for any sort of reprieve, it seems that we’re on the way there. The Bank of Canada announced the first interest rate cut of the cycle just last month, bringing the trendsetting policy rate down to 4.75%. That’s the lowest that figure has been since July 2023.
And many believe another cut is imminent. Tuesday’s housing starts release from CMHC was joined by a new Consumer Price Index reading from Statistics Canada, which revealed that inflation came in at just 2.7% in June, down from 2.9% in May.
Although markets were already heavily pricing a July rate cut even prior to the latest StatCan CPI release, the data all but ‘cements’ a rate cut at the BoC’s next rate announcement, CIBC Economist Katherine Judge said in an economic flash on Tuesday. Judge also pointed out that, taking out the eight most volatile components of inflation, such as mortgage costs, the BoC’s preferred measures of CPI-trim and median “are running only a hair above the 2% target.”
Also in the July-rate-cut-camp are economists with RBC, Desjardins, and BMO, with BMO’s Benjamin Reitzes in particular calling for another 25-basis-point cut, which would bring the policy interest rate down to 4.5%. Meanwhile, economists with TD and Scotiabank remain on the fence about what next week BoC announcement will bring.
