Housing starts might be down, but that doesn't mean the markets are
Housing starts are expected to dip in two of Canada’s three largest this year amid stress test difficulties, higher renewal rates, and a slumping economy.
According to an Altus Group report, Toronto and Vancouver are staring down another turbulent year in which housing starts will fall. Montreal, on the other hand, expects to keep riding high until at least next year—although affordability challenges and a cooling economy will soon catch up with buyers, while possible immigration restrictions could dampen housing demand. While housing starts will remain elevated in Montreal through 2019, that should change by 2020.
According to the report, Toronto appears to have hit a wall after 2017. In 2018, housing starts reached a six-year high in the city, but they will drop this year.
“They had a buoyant benchmark last year, but that was following pretty strong sales in the period before that, and we saw new home sales—which are all preconstruction sales—decline significant last year, as they were down 40%,” said Peter Norman, Altus Group’s vice president and chief economist. “That decline last year is going to come through as a characteristic for starts this year.”
In 2018, housing starts in Toronto peaked at 41,000 units, 30,000 of which were condos. The single-family sector, however, produces very few starts; before the 2008 recession there were 15-20,000 new units per annum, but only 6,000 last year.
“[Starts across all housing types are] moderating a little bit into 2019. We’ll hit a slightly lower number, but it’s still at high levels by historical standards,” said Norman. “The single-family story is one of general financial conditions—mortgage rules, on the one hand, and a rising interest rate environment put a big damper on housing demand. Elevated pricing in the Toronto market, in particular, with weakening financial conditions for households meant we have affordability issues, and that took the wind out of demand for single-family housing.”
Vancouver has hit a nadir, at least ostensibly. The mortgage stress test along with higher renewal rates and the foreign buyer tax have cooled demand, in spite of the above-average wage growth, strong population inflow and robust employment.
Norman says slower housing starts in 2019 are due to strained affordability issues and supply constraints in both the single-family and medium-density housing sectors, which also explain new home sales dipping 10% and overall sales 33% in 2018.
However, he added that things aren’t going south.
“Last year, we had 23,000 housing starts, which were down a little from 2017, but still in line with the five-year average, and we expect the 20-23,000 range over the next couple of years as well. It’s not a deep dive; I’d call it a holding pattern. Although we’ve had some adjustment in Vancouver with pricing, on a year-over-year basis prices are still 10-15% higher than they were five years ago, so there’s still asset appreciation.”
