A notable increase in housing starts, led primarily by Vancouver and Toronto, may face significant headwinds in the coming months due to increased building costs and rising interest rates, warns the Canada Mortgage and Housing Corp. (CMHC).
In the first half of 2023, new housing construction in several major Canadian cities saw a modest uptick of 1% over the previous year. This surge in building activity was largely driven by a boom in apartment constructions, aiming to offset a decline in other dwelling types. Vancouver and Toronto, in particular, saw exceptional growth with housing starts rising 49% and 32% respectively, compared to the same period in 2022. These figures surpassed levels observed in the past five years.
However, not all cities experienced this upswing. Montreal witnessed a sharp drop in housing starts, with a decrease of 58% compared to the first half of the previous year. Edmonton and Ottawa also saw reductions of 29% and 18%, respectively, while Calgary’s housing starts remained consistent.
The CMHC’s mid-year housing supply report released earlier this week provided insight into these patterns. “Buildings in Toronto and Vancouver tend to be taller than developments in Montreal, and they therefore need a longer time frame before construction can begin,” the report noted. This may suggest that projects in these cities that began construction in 2023 had their financing secured in 2022 — prior to the Bank of Canada’s rapid interest rate increases. In contrast, Montreal’s shorter construction turnarounds, likely financed more recently, faced steeper borrowing costs, limiting project viability.
The CMHC also highlighted other looming challenges for the housing sector. “Economic challenges will likely slow the pace of apartment starts in Toronto and Vancouver in the second half of the year,” stated the report. This prediction is underpinned by barriers such as escalating construction costs, even though the CMHC acknowledged that the rate of these price hikes has slowed in comparison to recent years.
The hot rental market remains another notable factor. Driven by the general affordability of purpose-built rental apartments, builders in cities like Calgary have shifted their focus. Where condominiums once dominated Calgary’s projects in the preceding five-year period, rental apartments comprised two-thirds of its starts in the first half of 2023. Similar trends were observed in Edmonton, with a staggering 96.8% of starts being apartments, a significant increase from the five-year average of 60.6%.
Despite these shifts, addressing Canada’s long-standing housing and affordability crisis remains a daunting task. The CMHC stressed that the current level of construction activity is insufficient in the long run and emphasized the need for “significant increases” in the industry’s productivity.
The federal government has been proactive in trying to alleviate these issues, rolling out measures to stimulate homebuilding. This comes in response to CMHC’s forecast that Canada’s national housing market will face a shortage of 3.5 million units by 2030, required to restore affordability.