Canadian housing starts experienced a significant decline in November, reaching their lowest level in six months. Factors such as high interest rates and a shortage of skilled labor have weighed heavily on construction activity, leading to this sharp decline. The Canada Mortgage and Housing Corp. reported that housing starts for November stood at a seasonally adjusted annualized rate of 212,624 units, which is a 22% decrease from the previous month. Economists had anticipated 260,000 housing starts for November, according to TD Securities. The Federal Housing Agency, CMHC, has cautioned that housing starts are expected to remain sluggish in the near future.
Impact of Economic Conditions
Kevin Hughes, Deputy Chief Economist at CMHC, explained that the significant drop in housing starts is not surprising given the tighter economic conditions that have affected construction timelines. He pointed out that the current economic climate has led to more difficult borrowing conditions and labor shortages, both of which are now evident in the start numbers. Consequently, it is expected that housing starts will continue to experience slower rates in the coming months.
Influence of Interest Rates
The benchmark interest rate set by the Bank of Canada currently stands at 5%, representing an increase of 4.75 percentage points since March 2022. Central bank officials have stated that they are not yet considering rate cuts until there is substantial evidence indicating that underlying inflation is following a sustainable downward trajectory.
Overall, the decline in Canadian housing starts reflects the challenges posed by high interest rates and a shortage of skilled labor. These factors are contributing to a slowdown in construction activity and are expected to exert continued pressure on housing starts in the near term.
Housing Starts on the Rise in November
The trend measure of housing starts in Canada saw a slight increase of 0.7% in November, reaching a total of 257,777 units. This measure is calculated as a six-month moving average of the monthly seasonally adjusted annual rate of housing starts.
In urban areas, starts for single-detached homes experienced a significant rise of 7%, totaling just over 44,000 units. However, this increase was overshadowed by a 27% drop in multi-unit starts, which include condominiums and row houses, bringing the total to 151,297 units.
Recently, a senior official from the Bank of Canada pointed out that the construction of housing in the country has failed to keep up with the population growth fueled by immigration. This has led to a surge in shelter inflation, reaching historically high levels.
According to data from the Bank of Canada, housing affordability in Canada during the third quarter of 2023 is at its lowest point since 1982. Economists at BMO Capital Markets have also noted that the three previous peaks of unaffordability in 1982, the early 1990s, and 2007-08 were all followed by recessions in the country.
To address these challenges, the Canada Mortgage and Housing Corporation (CMHC) has stated that the country needs an additional 3.5 million new homes, surpassing current construction forecasts. This would help to bring house prices down to levels considered affordable.