Canada

Canadian Home Building Investment Has Officially Gone From A Correction To A Crash

Canadian investment in home construction is slipping and due entirely to housing. Statistics Canada (Stat Can) data shows building construction investment fell in September. This data is mostly based on building permits, providing insight into construction sentiment. Home building isn’t doing so hot — falling enough to be considered a technical crash. It fell so fast, it dragged the whole index lower. 

Building Construction Investment Falls For A Fifth Month

Canadian real estate development intentions continue to spiral lower. Seasonally adjusted construction investment fell to $17.5 billion in September. This is 0.7% lower than the month before, marking its fifth consecutive decline since peaking in April. The value of the segment is now 11.6% lower than it was at the peak — a sharp drop into “correction” territory.

Then there’s inflation. As big as that drop was, it gets even larger when measured in real terms. Stat Can said real construction investment fell to $12.0 billion in September, down 1.5% from a month before. Real dollar values are now 16.6% lower than they were during the peak hit in April. The monthly decline doubles when inflation-adjusted.

Residential Building Construction Investment Has Crashed

New home building represented the entire drop in construction investment (and then some). Seasonally adjusted real residential construction investment fell to $8.4 billion in September. This is down 2.7% from a month before and also peaked in April. Since the peak, the value of home construction investment has fallen 22.1% lower. A drop of more than 20% in less than 12 months is technically considered a crash. This is officially a crash of home construction investment.

Canadian Residential Building Construction Investment

Source: Stat Can; Better Dwelling.

Non-Residential Building Construction Is Holding Up Well

On a positive note, non-residential investment showed growth. The segment saw seasonally adjusted real investment reach $3.6 billion in September. This is an increase of 1.3% from a month before, but this segment peaked all the way back in 2014. That’s a long time considering these are buildings where jobs are created. Residential investment likely absorbed most of the capital.

The crash in residential investment is the big story here — it’s responsible for all of the declines. Unstable inflation is one of the biggest reasons, especially with rates stimulating demand. Home builders have delayed or postponed half of their projects due to future costs. It’s hard to make a profit building a home if you’re not sure what your costs are going to be. 

No need to worry about supply… yet. There’s more than enough housing in the pipeline that’s just been started or under construction. 

13 Comments

COMMENT POLICY:
We encourage you to have a civil discussion. Note that reads "civil," which means don't act like jerks to each other. Still unclear? No name-calling, racism, or hate speech. Seriously, you're adults – act like it.

Any comments that violates these simple rules, will be removed promptly – along with your full comment history. Oh yeah, you'll also lose further commenting privileges. So if your comments disappear, it's not because the illuminati is screening you because they hate the truth, it's because you violated our simple rules.

  • Van YIMBY 3 weeks ago

    No s**t. Did people really think developers were going to see their building costs rise and housing supply catch up with the population and then start building for cheaper with inflation at 5%?

  • Trader Jim 3 weeks ago

    For those that missed the BD weekend newsletter, it contained a history lesson builder profitability at cyclical peaks. It always shrinks and they start losing money.

    Did some digging and it was common with the US too. Prices were soaring and developers couldn’t make a profit so they pulled back on building. m

    2005 forum posts with small builders doing one offs and comments (half joking) about profit margins being 5%.
    https://www.finehomebuilding.com/forum/spec-house-profit

    2006 NYT article on developers having almost no profit margin. Prices were still rising and they were still claiming a housing shortage in places like So Cal. Keep in mind California has the population of Canada (and the GDP), so the “shortage” of housing was an even more concentrated shortage at the time.
    https://www.nytimes.com/2007/03/04/realestate/commercial/04SQFT.html

    Some might say back then developers profit margin shrunk because they were cutting prices. When inflation is this high and prices have stalled, they’re cutting prices on an inflation-adjusted basis since their costs are still rising but they’re taking a discount.

  • Peter Mitel 3 weeks ago

    Stats Canada is there to provide numbers. And numbers can be interpreted in so many different ways.
    The reason why there are less new homes being built is due to the lack of supply. All cities are now pushing for densification as no more lands available.
    There are still a lot of people needing a home and we need to find homes for 1.2 million new immigrants coming within 3 years!

    • David 3 weeks ago

      There’s not enough supply, so they won’t build supply. Genius, bud. Where’d you, Harvard? Because your logic makes so little sense, you must be a genius and the rest of just don’t understand the 4d explanation you’re providing.

      When there is no supply, you build supply. There’s demand for new supply.

      The article LITERALLY links to home builders saying they canceled half of their supply because of building costs. The more housing you build, the more expensive it is to build. There are only so many people that can build homes.

      We need to delay projects because our labor bids are already 25%+ higher on projects.

      Instead boy genius here needs to explain we’re not building homes because there are too few homes.

      • Ryan 3 weeks ago

        I think he was referring to land supply. Last I checked they aint building and new land to build on in Toronto. And zoning prevents densification. So basically, where are you going to put these new builds even if you want to?

        • David 3 weeks ago

          So we bought the land, made plans for building, and then we ran out of land so we’re not going to build on it? I love when people explain the industry to me. It’s weird because if there was no land and everyone wants supply, we should be able to sell these units for any amount of money regardless of what it costs to build.

          Plenty of high-rise projects that ARE zoned have stalled. Try getting a crane or concrete. If you can get it for less than 20% more than it cost in 2019, I’d be happy to pay you a 30% premium.

  • M.Bury 3 weeks ago

    “No need to worry about supply… yet. There’s more than enough housing in the pipeline that’s just been started or under construction. ”

    Not to mention 1.3 million vacant homes…

  • peter kistemaker 3 weeks ago

    I can help you write articles like this so they seem more professional. Feel free to reach out.

    • RW 3 weeks ago

      Must be your first time reading Better Dwelling. Maybe try the about page before figuring you can improve their product.

      They publish two articles for each topic. A long-form written for institutions with in-depth analysis and targeted for people with an analyst background. It includes things I need to pay for but isn’t interesting to Joe Sixpack who needs a minimal understanding.

      Then there is this one written for readability and “language you would use at a bar.” It’s meant to be informal and less professional to remove the barrier to understanding the data.

      The guys that founded it sold a company that did learning optimization prior to starting this. Before that, they worked in finance. The lack of “professional” is intentional.

      • Peter 2 weeks ago

        “Canadian investment in home construction is slipping and due entirely to housing”

        “Real dollar values are now 16.6% lower than they were during the peak hit in April”

        “Unstable inflation is one of the biggest reasons, especially with rates stimulating demand”

        “No need to worry about supply… yet. There’s more than enough housing in the pipeline that’s just been started or under construction. ”

        Some people may take issue with these sentences in both style and substance. I present them merely as an addendum to my original comment.

        I have no doubt that the people behind ‘this’ are talented, intelligent individuals. They clearly are very adept in many ways. I just personally feel the article could deliver more value to its readers with a few small changes, but perhaps that is not necessary to achieve its purpose.

        Thank you for your time.

  • David English 3 weeks ago

    So, ignore the words and look at the chart. Does that chart not say there was a Covid hole and then a spike to make up for it? The crazy spike in construction soaked up all the unemployed they could get to work. Now, everyone wants their employees back. Thus, things are, you know, getting back to normal, right? Well, everything but inflation. That’s what the chart says.

    I would not consider the end of a temporary surge, one of historic proportions, to be a crash, especially when it’s due to highly unusual circumstances.

    • Kyle 2 weeks ago

      No, because the volume of dollars in the gap is smaller than the volume of dollars on the spike. Maybe if you didn’t look at the numbers that would make sense.

      The spike in construction is the reason it’s a “crash.” A crash is exactly what you just described — a misallocation of resources from one industry to another. If a company makes 50% less the next year, they need to fire 50% of staff. That becomes the risk.

      “Going back to work.” You think people dabbled working on high rise cranes for a few weeks and are now going back to their job pouring coffee?

      • David English 2 weeks ago

        “If a company makes 50% less the next year, they need to fire 50% of staff. That becomes the risk…. You think people dabbled working on high rise cranes for a few weeks and are now going back to their job pouring coffee?”

        Wage inflation… it’s not that they have to fire 50% of their staff. It’s that they can’t afford to hire them, or keep them. And, it’s not the high-skill jobs we’re talking about here. You can’t compare a crane operator to someone pouring coffee. But, if there’s no laborers to move the crane load from where it’s dropped to where it’s needed, then said crane operator is going to be rather bored.

        And, I stand by my point. “crashing” back to normal after a boom caused by highly unusual circumstances does not seem like something to fret over. At least where I live, there was a chronic shortage of construction workers before the pandemic. Clearly (if you look at that chart) that had to have changed during the pandemic. That boom required people to make it happen. They came from somewhere. Well, now the construction industry is again competing for workers and everyone else is paying more. There was a restaurant offering dishwashers $22 to start. Another offering $1000 signing bonuses at a hotel. You think someone is going to hump around sheets of drywall for less?

Comments are closed.