Cdn. Residential Construction and Credit — Adjustment Continues

Canadian housing starts fell 11.2% to 213,900 annualized units in March. While some volatile weather likely impacted activity in recent months, it’s a good time to step back and look at the bigger, smoothed out picture for Canadian residential construction. The short story is that activity is slowing meaningfully from very elevated levels. For all of Q1, starts averaged a 223k pace, the weakest quarter since the depth of the pandemic in early-2020. On a six-month basis, starts are now running at a 241k pace, the lowest since late-2020. Indeed, it appears that weaker market conditions have, as expected, put a lid on new construction, and activity is poised to settle back into pre-COVID ranges of around 200k-to-220k.

Both single- and multi-unit starts were down in March and for all of Q1. Single-family construction has fallen notably, with 41k units in March nearing the lows seen in early-2019 and during the depth of COVID. By contrast, while multi-unit activity has also backed off, starts in that segment sat at 152k in the month.

Make no mistake, we are still seeing a historically robust level of activity, but the downward turn is going to confound policymakers that have been pushing for a doubling of output. As we’ve argued since the day Budget 2022 was tabled, doubling residential construction would be next to impossible given the industry is already running at full capacity, and Canada is already building more units per capita than it ever has. To double output from this lofty starting point is, let’s just say, a bit of a fantasy. Now, with market conditions turning since the Bank of Canada began raising interest rates, investors shying away from the market, and pre-construction sales reportedly quiet, builders appear to be backing off somewhat.

Despite that, we continue to see a floor for residential construction not too far from recent more subdued levels given relentless population growth and millennial household formation. In fact, if construction slows as we are now seeing signs of, we could come out other side of this cycle fighting many of the same problems—tight supply relative to demographic growth; and a mix of housing (lots of condos but few singles) that is not matching demographic needs.

In a separate release, Canadian household credit grew 0.3% in February, and has settled into a 3.5% annualized pace over the past three months. Residential mortgage credit growth, after slowing sharply for the past year, is also stabilizing at a similar clip (3.7% a.r. in the latest three months). That is roughly in-line with the low end of pre-COVID norms, and looks like a favourable ‘soft landing’ spot for credit growth if it holds. Keep in mind that growth was running at a more than 10% annualized clip before the Bank of Canada began to tighten. We’ve also seen mortgage preferences swing dramatically recently, with variable-rate product making up just 13% of new lending as of February, down from more than 60% at the highs in early-2022 (i.e., the good old days when Canadians were piling into variable-rate mortgages around 1.5%). The bulk of activity has now shifted into short-term fixed rate mortgages, where rates are touch higher than 5-year fixed because of the inverted curve, but likely viewed as more flexible by those who assume interest rate cuts over the next one-to-three years.

Table 1 - Canada — Housing Starts

(thousands of units : a.r.)