Canada's Housing Market Dips: A 22% Drop in November Starts
The Canadian housing market experienced a significant contraction in November, with housing starts plummeting by 22% compared to the previous month. This sharp decline underscores the challenges facing the sector, including high interest rates and a shortage of skilled labor, which are disrupting construction timelines and dampening growth prospects.
A Steep Decline in Housing Construction
In November, the seasonally adjusted annualized rate of housing starts fell to just 212,624 units, marking a dramatic downturn from the downwardly revised figure of 272,264 units in October. The drop was much steeper than economists had anticipated. A poll conducted by Reuters had forecasted a decline to 257,100 units, signaling that the market downturn exceeded expectations.
Furthermore, the decrease was driven by declines across both segments of the market: multiple unit urban homes and single-family detached urban homes. Specifically, starts for single-detached homes in urban areas saw a modest increase of 7% to just over 44,000 units, while multi-unit starts experienced a more pronounced drop of 27% to 151,297 units.
Kevin Hughes, deputy chief economist at the Canada Mortgage and Housing Corporation (CMHC), pointed out that the “notable drop in the rate of housing starts in November… should not come as a major surprise and reflects tighter economic conditions impacting construction timelines.”
Implications for Housing Affordability and Supply
The downturn in housing starts arrives amid a backdrop of deteriorating housing affordability in Canada. According to data from the Bank of Canada, the third quarter of 2023 witnessed housing affordability at its worst level since 1982. This is largely due to the Bank of Canada’s benchmark interest rate currently standing at 5%, representing a significant increase of 4.75 percentage points since March 2022.
Despite the bleak figures for November, the trend measure—a six-month moving average of the monthly seasonally adjusted annual rates—saw a slight uptick of 0.7% to 257,777 units. This indicates a modest increase in housing starts, which may suggest some resilience in the market. However, CMHC has warned that the overall trend for housing starts is expected to remain sluggish in the near term, with the organization stating that Canada needs an additional 3.5 million new homes to meet forecasted construction demands.
Regional Variations and Future Outlook
The impact of the housing starts decline was not evenly distributed across Canada. Major cities such as Montreal, Toronto, and Vancouver saw some of the most significant decreases, with total seasonally adjusted annualized rate (SAAR) housing starts falling by 30% in Montreal and 39% in both Toronto and Vancouver. Rural starts, on the other hand, were estimated at a monthly SAAR of 17,261 units.
Moving forward, CMHC expects continued slower starts rates in the coming months, attributing this to difficult borrowing conditions and persistent labor shortages. This aligns with the broader trend of economic tightening and challenges within the construction industry.
Canadian Home Sales and Prices Show Varied Trends
Amid the housing starts decline, Canadian home sales also fell by 0.9% from October to November and saw a 0.9% decrease on an annual basis. The Home Price Index edged down 1.1% on the month, yet it was up 0.6% annually. The national average selling price, however, defied the downward trend, recording a 2% increase over the year.
These mixed indicators reflect a complex housing market where various forces, including supply constraints, high interest rates, and shifting demand, are at play. The slight increase in the annual Home Price Index suggests that despite monthly fluctuations, there is still some underlying strength in property values over the long term.
In summary, the Canadian housing market is facing a period of adjustment, with significant challenges impacting both the construction and sales segments. As economic conditions continue to evolve, stakeholders in the housing market will be closely monitoring these trends to gauge the future direction of housing affordability and supply in Canada.