Canadian Investment In Home Construction Is Officially In Correction Territory

Canadian home building is near record activity, but it appears it’s hard to keep finding new money. Statistics Canada (Stat Can) data shows investment in building construction fell in August. The decline marked the fourth consecutive month, and it was due entirely to housing. Residential building construction investment dropped so fast, it’s now technically a correction.

Canadian Building Construction Fell For The Fourth Month In A Row

Canadian building construction edged lower once again. Seasonally adjusted building construction investment fell to $17.7 billion in August. This is down 2.0% compared to a month before, a substantial single-month drop. Stat Can estimates this is $12.7 billion when adjusted for inflation, with a 2.6% decline over the same period. A lot in that paragraph, but it’s hard not to focus on how large the inflation adjustment was. It trimmed nearly a third.

Building construction has been following this trend since peaking in April. August marked the fourth consecutive month to see seasonally adjusted volumes fall. From the peak in April to the number reported in August, monthly dollar volumes are 10.5% lower. That technically makes this a correction, driven entirely by a slowdown in housing.

Falling Home Building Investment Is Responsible For The Drop

Residential building construction, aka housing construction, was overrepresented in the cooldown. Actually, it was the whole cooldown. Seasonally adjusted residential building construction fell to $13.0 billion in August. This is 2.9% lower than the month before, with declines in every province but Nova Scotia. In case you missed it, that’s where everyone fleeing Ontario is heading these days.

Canadian Residential Building Construction Investment

The monthly dollar value of residential building construction in Canada.

Source: Stat Can; Better Dwelling.

Representing the lion’s share of total building construction, it also peaked in April. As one would expect, this segment reported four consecutive declines as well. The latest numbers are down 14.2% from the peak in April to the current trough in August. That also puts it in “correction” territory. There’s probably still no need to worry about supply yet. The trend is still significantly elevated above pre-pandemic levels.

Non-Residential Building Construction Is Softening The Impact

Not all of the data in the latest release was bad news. Non-residential building construction pushed higher. The segment reached $4.7 billion in August, up 0.6% from the previous month. This segment includes commercial, industrial, and institutional buildings. These are places that facilitate commerce, and productivity. More bluntly put, this is where work happens and it’s good news to see investment sink into this area.

Canadian building construction slipped lower, but it’s still high compared to pre-pandemic data. As mentioned over the past few months, this is more of a concern for the economy than supply. It’s still at dollar volumes much higher than we’ve seen in the past decade, so supply is coming. Since the economy is so dependent on real estate though, the drop can prove to be a drag on the recovery.

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  • Ronson Chan 3 years ago

    Is that actually what it says or is it just the cost of materials dropping?

    • Gerald Haw 3 years ago

      The cost of materials is secured long before the drop, so that wouldn’t have an impact until later this year. Ask any developer, and their costs haven’t dropped. Lumber came down, but fuel and labor are up significantly.

      People think developers are raking in the cash since the pandemic, but most are making smaller margins than pre-pandemic due to the labor and supply squeeze.

  • Gerald Haw 3 years ago

    Why build now when JT will boost your profits later?

    • Van YIMBY 3 years ago

      If we wanted to build, how would we? Decent trade people are busy completing record home construction until next year (some right through 2023). We need to facilitate creating more tradespeople into the industry.

      • Yusef 3 years ago

        Won’t be helped by the fact the gov wants to create a s**t ton of optional infrastructure projects to facilitate “growth.” Unlimited budgets competition for tradespeople that are supposed to see their costs moderate to help home building costs.

        The government is one of the biggest drivers of home prices, and it’s going to do it even faster to “boost” the economy.

  • Trader Jim 3 years ago

    Strong loonie is good for inflation but bad for attracting investment. Low yields also make it damn near impossible to get fixed income capital unless it’s’ from the government or syndicated mortgages.

  • Chris 3 years ago

    My guess here is that this, being developers, is smart money. And it’s fleeing.

    Smart money always flees before dumb money does. And usually, the whole time the people whose money is fleeing the environment will be telling you that things will all be okay going forward.

    Sometimes they don’t even realize they don’t believe what they’re saying. My (honestly excellent) realtor has told me he doesn’t think house prices are going down, but they might stabilize. Meanwhile he’s also told me he and his brother and partner in building have stopped building and are investing in precious metals. Doesn’t even realize the contradiction, and he’s a smart man.

  • Anonymous 3 years ago

    Cost of material is increasing. The massive profits of quarters past have been cinched.

    • lorraine st james 3 years ago

      My guess would also be the same, China is beginning to see their largest developers go down and Evergrande (one of the largest developers in China) owe 300 billion and have missed interest payments of 300 million for the past few months. Since this disclosure a few weeks ago other huge developers are also starting to miss payments and cannot borrow any more money. They will have to liquidate.

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