Higher borrowing costs are expected to drive drastic slowdowns in homebuilding for Canada’s largest urban centres after a surge in activity that started the year, according to the Canada Mortgage and Housing Corp.
The CMHC’s mid-year housing supply report released Thursday shows Canada’s six largest housing markets had wildly different paces of homebuilding in the six months of the year.
Vancouver and Toronto saw their paces of homebuilding surge 49 per cent and 32 per cent compared with the first half of 2022, the agency said. These two metropolises accounted for two-thirds of all housing starts in Canada’s six biggest cities over the first six months.
That compares with a sharp drop of 58 per cent for new housing starts in Montreal. Ottawa and Edmonton also saw annual declines, with Calgary holding steady.
Across all six markets, housing starts in the first half were up just one per cent year-over-year, CMHC said.
The difference in the pace of homebuilding between cities like Montreal and the behemoths of Vancouver and Toronto might come down to timing, the report noted.
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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.
That means that projects in Toronto and Vancouver that had shovels in the ground in the first half of 2023 likely had financing secured in 2022 — before the Bank of Canada’s rapid interest rate hiking cycle had reached its tightest points.
Comparatively, buildings in Montreal with a shorter turnaround time were likely getting their financing more recently, with higher borrowing costs limiting the viability of some projects.
From this lens, CMHC theorized it might only be a matter of time before the lags that hit Montreal in the first half of the year come for Toronto and Vancouver.
“Economic challenges will likely slow the pace of apartment starts in Toronto and Vancouver in the second half of the year,” the report read.
Higher construction costs also continue to pose a barrier for builders getting shovels in the ground, though CMHC noted that the pace of price hikes here has slowed from recent years.
A hot rental market and the general affordability of purpose-built rental apartments also spurred builders in many cities to focus their efforts on this side of the sector, CMHC noted.
Cities such as Calgary, which typically had condominiums make up two-thirds of its projects in the previous five-year period, instead saw rental apartments make up two-thirds of its starts in the first half of 2023. In Edmonton, a whopping 96.8 per cent of starts in the first six months of the year were in the apartment category, compared with a five-year average of 60.6 per cent.
Montreal and Vancouver were the only two cities that saw relatively steady levels of condo and apartment builds in the first half of the year compared with the five-year average.
The CMHC is forecasting strong rental demand in the second half of the year, reflecting higher barriers to home ownership caused by high prices and interest rates.
It says the overall level of new construction activity remains too low to address Canada’s affordability and housing supply crisis over the longer term, and “significant increases” in the construction industry’s productivity will be needed.
The federal government has been rolling out new measures aimed at stimulating the pace of homebuilding in Canada amid CMHC forecasts that the national housing market will be short 3.5 million units to restore affordability by 2030.
Prime Minister Justin Trudeau was asked about the latest CMHC housing supply report in Vaughan, Ont., on Thursday, where he was announcing a funding agreement with the city to fast-track the construction of 1,700 new housing units.
Trudeau defended the government’s track record on housing construction but acknowledged “there’s lots more to do” as higher construction costs and interest rates put “pressures” on builders.
He said his government is “moving forward as quickly as possible” on implementing Bill C-56, which includes a GST rebate for new purpose-built rental apartments in Canada, as one action he said can help make shelved housing projects viable again.
— with files from The Canadian Press
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