Canadian housing starts rose to 274,700 annualized units in October from just over 270k in the prior month, an impressive show of resilience given the headwinds facing real estate more broadly. Over the past six months, starts have now averaged 256k annualized, and they’ve run at 248k over the past 12 months. Both single- and multi-unit starts rose in October. At the regional level, Ontario starts pulled back slightly but remained above 100k, which is very solid activity. And, B.C. broke ground on 60k units, well up from the past three months.

A few quick takeaways from these numbers and what’s going on in Canadian residential construction more broadly as we close out the year:

Starts are still on pace to be down from levels seen in each of the past two years, which we expected. That’s counter to policy goals effectively targeting a tripling of residential construction over the next decade (dating back to Ottawa’s Budget 2022). We continue to believe that those goals are simply not achievable given capacity constraints in the industry, where builders are already doing just about all they can.

That said, the resilience in construction is impressive, and starts are holding up much better than normal in the face of cracking demand. As was reported yesterday, Canadian existing home sales have now fallen back to the low end of the pre-COVID range, and investor demand (often a driver of new building activity) has faded alongside high mortgage and tempered price growth expectations.

Demographic demand is clearly putting a floor under construction activity, with 3% population growth limiting how much activity can pull back. Borrowing costs and material/labour costs are surely pinching builders, but the physical demand is there. And, government incentives to push new projects, especially in affordable housing and purpose-built rentals, seem to be helping at the margin.

We continue to believe that one needs to separate the price of the asset that is housing, and the underlying physical market. The former is under pressure, as expected, with higher mortgage rates cleaning up a lot of price froth. But, the latter is still very well-supported by demographic flows.

Finally, this is a good example of how torrid population flows are supportive of the economy, inflation in the short run, and will keep interest rates higher than they otherwise would be in the near term. The example here is that a highly interest-sensitive sector of the economy is holding up very well in the face of 475 bps of tightening.

The Bottom Line: Residential construction is holding up well, with population growth and government incentives countering the impact of higher borrowing costs and weaker investor demand. That said, starts will likely still drift down this year and next due to cyclical pressure, and remain a long way from government supply goals.

Read important disclosures.