Higher Rates Drag Canadian Housing Starts Back to Pandemic Levels

(Bloomberg) — Canadian housing starts are running at the weakest pace since the early months of the Covid-19 crisis, further dwindling the potential supply of homes available in the country.

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Builders started work on an annualized 213,900 units in March, according to data released Wednesday by the Canada Mortgage and Housing Corp., less than the 237,500 expected in a Bloomberg survey of economists. The 11% drop brings the 3-month moving average to 222,600 units, the weakest pace of construction since July 2020, in the midst of sweeping pandemic lockdowns.

The data highlight another major headwind for housing affordability in Canada as record immigration rates bolster housing demand amid a dearth of supply. And while Canada’s housing resale market is expected to start recovering in the second half of this year, the data suggest higher borrowing costs are weighing on developers’ decisions to start new projects.

“Homebuilding appears to be slowing under the weight of higher interest rates,” Andrew Grantham, an economist with Canadian Imperial Bank of Commerce, said in a report to investors. “Residential investment remains a drag on GDP, even as resale activity has stabilized.”

The Bank of Canada held its benchmark overnight rate at 4.5% last week, its second consecutive pause after 425 basis points of tightening in less than a year. Markets expect Governor Tiff Macklem will keep rates steady until at least the end of this year, though overnight swaps traders have started to price the chance of an additional hike.

In a separate report Wednesday, CMHC said the resulting higher financing costs would probably dampen new construction throughout 2023.

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“Some projects may become unviable at current financing rates, or construction financing will become harder to obtain,” Eric Bond, a housing market analyst with the agency, said in the release.

Credit data released by Statistics Canada confirm housing demand remains steady, with Canada mortgage loan growth still rising at a nearly 6% yearly pace, down from the peak of frenzied home buying activity of 2021, but still elevated relative to pre-pandemic levels.

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