Check out the latest on the Canadian housing market
Housing Starts Slow in January
The Canada Mortgage and Housing Corporation (CMHC) reported last week that the annual pace of housing starts slowed in January, dropping less than was expected for the start of the year.
CMHC said the seasonally adjusted annual rate came in at 207,968 units for the first month of the year compared with 213,630 in December. Economists had expected an annualized pace of 205,000 for January, according to Thomson Reuters Eikon.
“After recent declines, the national trend in housing starts held steady in January and remained above historical average,” said Bob Dugan, CMHC’s chief economist, in a release. “While single-detached starts continued to trend lower in January, this was offset by an uptick in the trend for multi-unit dwellings in urban centres.”
CMHC’s data showed the annual pace of urban starts slowed 2.1 per cent in January to 190,912 units as single-detached urban starts fell 10.4 per cent to 44,559 units. The annual pace of multiple-unit projects such as condominiums, apartments and townhouses increased 0.7 per cent to 146,353 units, while rural starts were estimated at a seasonally adjusted annual rate of 17,056 units.
In Vancouver, where the housing market has long been considered among the country’s most heated, CMHC said housing starts were holding steady after trending lower in the second half of 2018.
In Toronto, housing starts saw little change, although increasing borrowing costs meant pre-construction sales of new homes remain low. CMHC said they expect this to result in even fewer units breaking ground this year.
BMO Capital Markets senior economist, Robert Kavcic, told investors that the level of activity across Ontario shows “there is supply coming in the market.” However, he cautioned that “maybe it’s not exactly the right mix and location —but there is supply coming to meet robust demand.”
Looking at other regions, CMHC said it observed housing starts slowing in Quebec and rising in Alberta from low levels. New Brunswick experienced a 33 per cent spike in starts, when compared with last year. CMHC said the spike largely stemmed from multiple-unit starts — a term referring to buildings such as condos, apartments and townhouses.
CIBC senior economist, Nathan Janzen, said in a note to investors that based on CMHC’s observations he expects housing starts nationally to begin to slow “more significantly” later in the year.
“New building activity has yet to follow home resales significantly lower…(but) there appears to be more strong building activity in the pipeline with permit issuance running at a 240k per month annualized rate in Q4 2018,” he concluded. “Housing starts typically follow resales with a lag, though.”
Building Permits Show Strength at End of 2018
Canadian building permits ended 2018 with the biggest gain in nineteen months, beating expectations and adding evidence of continued construction strength: The value of permits rose 6 per cent to $8.8 billion n December.
Statistics Canada reported last week the largest monthly gain since May 2017 and the fourth consecutive increase. Economists surveyed by Bloomberg expected the value of construction permits to contract by 1 per cent.
The surprise gain reinforces the changing focus of housing construction in Canada. The 4.2 per cent gain in residential permits was largely driven by multiple unit housing, which jumped 11.1 per cent to a record $3.3 billion. Conversely, the value of permits for single-family dwellings dropped 5.4 per cent.
Gains in commercial and industrial permits also contributed to the strong December tally, rising 14.6 per cent and 11.9 per cent respectively. Those increases brought the total value of non-residential permits up 8.9 per cent to $3.5 billion.
Consumption and residential housing in Canada has been markedly weakened amid higher interest rates and tighter mortgage rules. The strong end to 2018 for permits may partly allay concerns about deeper fallout for the construction industry from slowing residential resales.
Regionally, the value of permits in Vancouver rose 26.3 per cent to $1.4 billion, and Toronto permits increased 3.5 per cent to $1.6 billion.
Building Permits – 2018 Annual Results
The total value of building permits rose 4.7 per cent in 2018 to $99.7 billion, the fifth consecutive annual increase. Higher construction intentions for multi-family dwellings and commercial buildings were the main factors behind the increase. Four provinces reported gains, led by British Columbia and Quebec. The largest decline was in Ontario, where the value of permits was down 2.2 per cent to $38.2 billion.
In the residential sector, the value of permits totalled $62.8 billion, up 5.2 per cent from 2017 and continuing the upward trend that started in 2010. The value of multi-family permits rose 22.7 per cent to $35.0 billion in 2018, while the value of single-family permits (-10.7% to $27.9 billion) fell for the first time since 2013. The CMA of Toronto led the increase for multi-family permits in 2018, and has been following a similar growth pattern to other major CMAs since 2010. Nationally, 2018 marked the first time where the value of multi-family permits exceeded the single-family component on an annual basis.
Construction intentions in the non-residential sector rose 3.7 per cent in 2018 to $36.9 billion. Increases in the commercial component (+18.4% to $21.6 billion) more than offset the decline for institutional buildings (-22.1% to $8.0 billion). The decrease in institutional building permits may be due, in part, to the end of the Post-Secondary Institutions Strategic Investment Fund, as applications to the program closed in February 2018. Meanwhile, permits for industrial buildings rose 3.6 per cent to $7.3 billion. Five provinces reported gains in the non-residential sector, led by British Columbia (+$1.5 billion) and Quebec (+$1.2 billion). The largest decline was in Ontario, where the value of non-residential building permits declined by $1.3 billion.
Toronto New Home Sales Drop to Lowest Level in Almost 20 Years as Unsold Condos Pile Up
After years of frenzied price increases, sales of new homes in Canada’s biggest city sank to the lowest in almost two decades in 2018 and the supply of unsold condos piled up, according to a pair of new reports released recently.
“Greater caution” should be taken when investing in new condo units, particularly over the short-term, as trends point toward slower appreciation, Shaun Hildebrand, president of condo research firm Urbanation, said in one of the reports. The “market has started to normalize after unprecedented activity in recent years.”
Toronto’s housing market is dramatically cooling after higher interest rates and new mortgage regulations bite. The city joins other global metropolises such as London and Sydney seeing a slowdown as international investors retreat and domestic buyers balk at higher prices.
Sales of new homes fell to 25,161 from 2017, according to the Building Industry and Land Development Association (BILD), which used data from Altus Group Ltd. That’s the lowest annual number since Toronto-based Altus started tracking the figures in 2000.
Single-family homes showed the biggest decline, plunging 50 per cent to 3,831 from 2017 and 74 per cent below the 10-year average. Condos sales fell 38 per cent to 21,330, but only 4 per cent below the 10-year average.
While the benchmark price of a new single-family home slumped 6.7 per cent to $1,143,505 in December on the year, condo prices surged 11 per cent to $796,815, according to BILD’s report.
But figures from Urbanation show further weakness building in condos as well. A record 21,991 units are expected to be completed this year, up 29 per cent from 2017. While 98 per cent of those units are pre-sold, more than half were bought by investors who will either rent their units or sell them, the firm said.
The number of unsold units in development jumped 47 per cent in the fourth quarter from the year before to more than a two-year high and price gains for units under development grew only 0.4 per cent between the third and fourth quarters, the smallest quarterly increase in almost three years.
“The slowdown in activity last year can partly be attributed to less demand from investors, who typically represent the largest component of new condominium purchasers,” in the Toronto region, according to Urbanation’s report.
“The market is out of balance,” said David Wilkes, president and chief executive officer of BILD. “We join other industry groups in calling on the federal government to revisit the stress test and allow a longer amortization period for first-time buyers. And we look forward to working with our municipal partners on removing barriers to development such as excessive red tape and outdated bylaws.”
Despite a growing regional population, demand for homes has been weakened by the “artificial influences on the market,” said Wilkes.
He predicted the industry faces another “tough year” if the stress test isn’t tweaked or eliminated to relieve home buyers of the need to qualify for loans at a rate 2 per cent higher than their lender offers or the Bank of Canada’s five-year benchmark rate.
“We believe (the stress test) has overshot the goals that the federal government had established for it and it is really blocking out new young families from qualifying to purchase their first home,” said Wilkes. “In many cases they can afford to carry the home but they can’t afford the artificial requirement to finance it that the stress test puts on it. They can’t come up with the downpayment or they can’t qualify for interest rates that we may never see.”
Wilkes also suggested the government could consider lengthening amortization periods to 30 years for Canada Mortgage and Housing Corporation-backed loans.
In 2008, Ottawa had extended those amortization periods to 40 years. That policy was gradually rolled back so that by 2012 it allowed only 25-year terms on those insured mortgages.
Wilkes praised Premier Doug Ford’s government for addressing housing supply. But he acknowledged there will be a lag in supply even after measures to boost new construction, such as changes to the land use policies encompassed in the provincial growth plan.
“It takes 10 to 11 years to bring on new developments, whether that’s single-family homes or condos,” he said. “Part of how long long it will take to get that new supply on will be dependent on the changes that are made in order to remove some of the inefficiencies, red tape and duplication that are currently in the system.”
Will Dunning, Mortgage Professionals Canada’s chief economist, said that the stress test, which some have suggested reduces buying power by 20 per cent, is “too fierce.”
The province is proposing lowering the population density targets prescribed in the 2017 update to its growth plan to encourage more housing in places such as Durham, Niagara and Halton regions, Barrie, Brantford, Guelph, Orillia, Simcoe, Peterborough and Kawartha. Some areas that were previously targeting development for 80 people or jobs per hectare would need to accomodate half that number under the proposal.
Some environmentalists and urbanists say it is a recipe for more sprawl because builders will put more single-family homes on land that requires residents to commute long distances.