Canadian housing starts declined to 198,065 annualized units in October, from a healthy 231,304 units in September. Given the rising importance of multi-unit construction, housing starts have become more unpredictable and volatile on a monthly basis. As such, CMHC has started reporting the 6-month moving average. This measure ticked up to 206,089, from 202,793 units in the prior month.
On a trend basis, CMHC cited that condominiums and purpose-built rentals have contributed to strong gains in new home construction so far this year. Meanwhile, the monthly decline merely reflected an easing in multi-unit construction (-22%), which was coming off of near-record levels in September. Single-family home construction (+1.2%) was up modestly in the month.
The decline was broad based across most major markets in Canada, with the exception of British Columbia, where starts rose 21%. Housing starts fell by close to 29% in both the Atlantic provinces and Quebec, and near 18% in Ontario and Prairie Region.
Even with the decline in new home construction in October, housing starts remain lofty and well ahead of the 170,000 to 180,000 annualized units needed to keep up with the estimated underlying pace of household formation. The strong underlying trend in new home construction through the second half of this year largely reflects a lagged response to strength in housing demand during the first half of the year. Builders are responding to the rapid home price gains and strong demand for new homes experienced in the first half of this year, as well as the low rental vacancy rates in many urban markets.
The pace of new home construction is likely to move back in line with more sustainable levels through the rest of 2015 and into 2016. For one, the stimulative impact of low interest rates is starting to wear off as far as demand for both new and existing homes. Secondly, the Federal Reserve is likely to raise rates as early as next month. This is likely to push up borrowing rates in Canada and should take some steam out of housing activity all together. Lastly, record completions are expected through the rest of the year and into 2016 for some key markets, such as Calgary, Edmonton and Toronto. Combined with already high inventory levels, rental vacancy rates are likely to edge higher, dissuading new homebuilding.
"We expect housing starts to clock in at just over 190,000 units this year, before easing back to 171,000 units next year as the aforementioned factors materialize", says TD Economics in a research note.
