Canadian new housing starts are returning to reality as cheap capital starts to ease. The Canada Mortgage and Housing Corporation (CMHC), the country’s state-owned insurer, reported housing starts fell in October. Housing starts are exactly what they sound like — homes that have started construction. The drop was large enough to be considered a technical “crash” from earlier this year. This follows the trend of falling investment, which should drag starts even lower.
Canadian Housing Starts Are Trending Lower
Canadian housing starts have begun to slow down dramatically from their peak. The trend reached 264,264 units in October, down 2.4% from the previous month. A “trend” measure is a six-month moving average of the monthly seasonally adjusted annual rates (SAAR) of housing starts. The CMHC often uses the number because it smoothes volatility. Though that’s what SAAR is for, so it’s sort of a double-smoothing of the data.
Canadian New Housing Starts
The seasonally adjusted annual rate of new housing starts across Canada.
Source: CMHC; Better Dwelling.
Canadian Residential Real Estate Starts Have Crashed 29%
The regular monthly SAAR data was significantly lower than the trend at this point. It fell to 236,554 housing starts as of October, a drop of 5.3% from the month before. This number has now fallen 29% from the peak reached in March, back during the lumber and material craze. October marks the third-month housing starts have been in “crash” territory.
Canada’s Elevated Inflation Is Hitting Home Builders
The housing start slowdown might seem odd with resale purchasing so strong. The industry provided some insight on this a few weeks ago, explaining the risk of inflation. Homebuilders are having difficulty planning around volatile material costs.
In some cases, this has forced some developers to go back to buyers and ask for extra funds to complete the home. Rather than overpricing the risk or risk an unprofitable development, they’re hitting pause. This has resulted in builders delaying half of the planned new housing developments.
Don’t conflate falling housing starts with a shortage of supply in the pipeline. At the current rate, housing starts are 9% higher than they were in 2020. It’s also 13% higher than it was in 2019 as well. There’s more supply and relief than we saw pre-pandemic.
The drop in new housing starts is more so an issue of the misallocation of capital (human and financial). When economies go all-in on an industry, normalization can mean a lot of capital finds itself in the wrong place. This leads to an adjustment phase where these resources optimize for better utilization.