Residential investment likely to boost Canada’s real GDP growth in H1 but may become a drag later

Canada's housing starts recovered in February, rising to 213k annualized, more than expectations and January's 165k. The six month moving average remained near the 200k mark. Growth of 46% m/m in urban multi-family starts mainly drove this rebound, whereas singles increased a moderated 6.1% m/m.

The regional divide in housing was seen in new home construction activity in February. In the provinces of Quebec, Ontario and the Atlantic, starts grew around 30%. Meanwhile, starts grew sharply by nearly 60% in British Columbia. In contrast, starts in Prairie regions dropped 2% and have been hovering around the lowest levels since 2011.

It is evident that general strength in housing market conditions throughout most of Canada and low interest rates has increased new home construction. The sharp rise in construction in British Columbia was expected. The region is likely to receive additional momentum from the recent government policy that removed land transfer taxes on new homes worth less than $750,000 in the province.

However conditions in Vancouver and Toronto continue to seem increasingly frothy. Meanwhile, requirements for higher down payment for insured mortgages are likely to begin a multi-year cooling in housing activity in Toronto and Vancouver. This is also expected to weigh on new home construction. Except for British Columbia, most markets seem to be amply supplied. Particularly, the Prairie markets are facing a housing glut as weak economic conditions have led to housing market downturn.

The data might also have been boosted by an unusually warm winter. During winter, construction usually comes to a near-halt. In all, housing starts are not expected to be sustained closed to the pace of 200k and are expected to drop to a more sustainable 180k by the end of 2016. Residential investment might continue to stimulate Canada's real GDP growth through H1 2016, but is later expected to become a drag.