Canadian Housing Starts Drop 20%, Which Normally Means A Correction: BMO

Canadian new housing starts made a sharp decline, which normally is a red flag for the economy. BMO senior economist Sal Guatieri said April’s numbers may not be the traditional leading indicator though. He argues there are a few factors that make this time different. I feel like I’ve heard this about another country before. Anyway, on to the numbers.  

Canadian Housing Starts Fall 20% In April

Canadian housing starts made a sharp decline last month. Seasonally adjusted at the annual rate (SAAR), starts fell to 268,631 units in April. This is down 19.8% from a month before. This is a sharp drop that would normally have a lot of analysts buzzing with calls. This time it barely made the news.

Housing starts are considered a leading indicator for cyclical activity. That means it’s helpful in gauging the direction of the economy. Rising starts typically align with an income boom, and rising economic activity. Falling starts is typically a sign the economy is running on fumes. Guatieri argues this may not be the case this time. At least in the near-term.

“Canadian housing starts pulled back 20% in April, a move that would normally incite cries of a correction. But not when: 1) it’s from a record high, 2) the 6-month average (279k) is still the highest since at least 1990, and 3) existing home sales are 45% above the past decade norm,” he said.

Don’t Expect Price Relief Anytime Soon From This Supply

Even with the decline, there’s going to be a lot of supply, but don’t expect it to have much of an impact in the near-term. New homes take years to build, meaning the record surge (and pull back) won’t impact the market any time soon. However, all of this stuff will eventually be built — assuming material costs work out. 

“The surge in construction likely comes too late to dial down the heat on prices in the near term, but it should help when (if) fiery demand cools off,” he said

Guatieri doesn’t have a reputation as a see-no-froth type of economist. This year alone, he’s highlighted a number of issues with the market. A few weeks ago he said, “asset prices start to raise red flags when they consistently outrun growth in underlying income or earnings.” It doesn’t take a real estate bull to realize how exuberant real estate buyers are. Forecasting they’ll do something, also doesn’t mean it makes sense for them to do it.

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  • Wyatt 3 years ago

    Can someone explain it to me like I’m five, why falling starts would be bad for the economy?

  • Jason Chau 3 years ago

    A lot of respect for Sal, but I think he’s wrong on this one. Prices will probably coast for a little, but this is a huge economic cliff they’re driving over.

  • Al 3 years ago

    When was the last time this site and its comments were wrong?
    Over the years since the inception of BetterDwelling, regular folks focused on doing not talking made hundreds of thousands on Real Estate while the authors and especially commenters keep calling for an RE crash pretty much every day. How the Dwelling promoted here is made any Better for the followers then? Think about it, guys.

    • Trader Jim 3 years ago

      Funny, I just read another one of the articles and people said Better Dwelling is just trying to pump home prices higher. People that are unable to control their emotions only see what they want to see.

      As for gains, this is an inflationary investment environment. Performance is relative. You made 20%, the NASDAQ made 60%. Now try to collect the money at the same time.

      • Al 3 years ago

        How is it 20%?
        Let’s take a typical 1 bed case (pick your project). With 15% down on a precon in 2017 and closing in the next year or two, the return is 600% over 4 years so far. Call it 150%/yr and counting.
        2 and 3 beds are in the same vicinity.

  • Steve Porter 3 years ago

    I find Better Dwelling over the past several months is all about doom and gloom. I used to share their articles with my clients, not so now with all the negativity. And most is knee jerk these days.

    • Trevor 3 years ago

      How to find a real estate agent that has a clear bias: He thinks when a bank says something, journalists shouldn’t report it.

      I send my clients their information all of the time. I would be doing them a disservice if I didn’t inform them of the risks in a clearly risky environment.

    • Al 3 years ago

      @Steve Porter, I would 100% agree with your statement if you change “the past several months” to “the past several years”

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