Canada

Canadian Real Estate Sees Another Leading Indicator Crash Over 20% From Peak

The Canadian real estate slowdown is getting started, as another leading indicator fades. Statistics Canada (Stat Can) data shows building permit values fell in August. Since permits are for future activity, a decline means less building is coming. All the declines were due to a drop in residential permits, which has fallen sharply from its peak. While the drop is sharp, there’s no need to worry about supply concerns yet. Even at this reduced volume, the value of permits still exceeds pre-pandemic levels.

Canadian Building Permits Fell 2.1%

Canadian building permits slid lower, but they’re still much higher than last year. The value reached a seasonally adjusted $9.7 billion in August, down 2.1% from the previous month. It’s still 16.9% higher than the same month last year, so not exactly a cratering of activity. Reduced permit values in Ontario (-9.9%) and BC (-7.5%) were the strongest regions contributing to the drop.

Canadian Building Permit Value

The seasonally adjusted value of Canadian building permits.

Source: Statistics Canada; Better Dwelling.

The drop in permit values are still fairly small, but there’s a big catch here. Permit values peaked in March 2021, and monthly values have now dropped 4.2% since then. Substantial, but not exactly an earth shattering drop.

Diving a little deeper though, we see construction activity is diverging. Residential buildings made a sharp drop, while non-residential buildings are making up lost ground. These are two district trends completely lost at the macro level.

A Homebuilding Slowdown Is Dragging The Whole Trend

Residential building permits have seen a sharp decline, after peaking earlier this year. The seasonally adjusted value of permits fell to $6.4 billion in August, down 8.3% from the month before. Compared to a year ago, this is still 9.7% higher. Still a lot of housing in the pipeline, but the investment frenzy is starting to fade.

Canadian Building Permit By Sector

The seasonally adjusted monthly value of Canadian building permits by residential and non-residential use.

Source: Statistics Canada; Better Dwelling.

The volume of residential building permits has dropped from the record. Monthly volumes fell from the all-time peak in March, and are now 22.0% lower. Once again, it’s still higher than anything seen prior to 2020. Canada is still in the middle of a new home construction boom that will carry for some time. However, it’s slowing from the record. Reduced activity, but not *that* reduced.  

Non-Residential Building Is Picking Up

Some good news. Non-residential building permits are on the rise once again. The value hit a seasonally adjusted $3.30 billion in August, up 12.3% from the previous month. Compared to last year, this is 33.8% higher. Non-residential buildings include commercial buildings like office towers, and shopping. It also includes industrial facilities, like factories.

Generally, it’s good news to see this rise, since these are places where new jobs will go. A rise in productive investment is good news for the economy. Especially since it was neglected for the past few years.

Canadian building permit data shows activity is still elevated, but reduced from peak. We’re still seeing much more capital sunk into future building than pre-pandemic. Even better, it’s spread across the country this time — from coast-to-coast. Prior, but recent, real estate booms were largely focused on Toronto and Vancouver. This is much more diverse growth.

At the same time, the building frenzy has attracted a lot of capital (human and financial). If the value of permits drops, some of this capital won’t be able to just “rollover.” This means it needs to be put to work in other areas of the economy, relatively fast. Failing that, real estate would further turn into a drag on the economy. It’s a lot easier to reallocate money than it is to reallocate specialized labor.

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14 Comments

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  • Mortgage Guy 2 weeks ago

    Anyone that didn’t see this as the cyclical peak is nuts. This is a mechanism of low interest rates, stimulating demand. Developers build when rates are low and they can extract the most from homebuyers. They buy land when rates are high and push property prices lower.

    • Trader Jim 2 weeks ago

      BMO called it a cyclical bottom for mortgage rates, which implies a cyclical top for building investment. Somehow this will never be discussed.

  • Gerald Haw 2 weeks ago

    The building peak is also not real adjusted, so imagine how much lower this really is turning.

    • Theo 2 weeks ago

      Another good point to consider is how does Canada keep pumping an ever-growing amount of capital into residential investment when over 10% of the economy is already based on housing? If it’s going for the Monaco model, housing should be free.

  • Theo 2 weeks ago

    Building boom out east is still going strong. Maybe it’s all of the people fleeing Ontario to get out here. lolol

  • Trader Jim 2 weeks ago

    Adjust the value by the old inflation basket, and I’m willing to bet this is almost 30% lower in real terms. The same building activity would have cost 17% more this year compared to last.

  • James Wilson 2 weeks ago

    Canada doesn’t have much other than real estate. It’s going to keep doing this until it collapses in a long-term, and irreparable way. Does anyone have confidence in this government doing the right thing?

    • a 2 weeks ago

      nope. Canada is no place for young educated people with skills, unless mom n dad leave u a home or your a millionaire. Otherwise life is 1000 times better in the US and you are wasting your energy and time in Chinada. Canada is a rigged game, you need to earn else where to be able to live well in canada.

  • RW 2 weeks ago

    The more people say the government policies are going to push home prices higher, the more it’s going to cause people to hang onto property.

    Expect inventory to squeeze going forward, but also these government programs aren’t going to cause the kind of bump higher people expect. At best, it offsets part of the impact of higher financing costs , and the increased stresstest.

    • Frank Daugherty 2 weeks ago

      This is a very salient point. First-time homebuyer programs haven’t been able to induce demand, but increased home prices for those that were already buying.

  • E. Jayelle 2 weeks ago

    Recent economists mostly agree it’s the supply side issue. Focus on social housing to reduce demand. Throwing incentives for middle income families only adds fuel to fire for profiteering by sellers. Reducing incentives like higher taxation may reduce the repeat of 2017 -mainly locals with up to 4 mortgages ( income based qualification).

    • Hannah 2 weeks ago

      Most economists (BMO, RBC, Scotiabank, etc.) have said it’s a demand side issue, but nice try. Does “recent economists” mean new? Because they clearly don’t have access to the mortgage side data.

  • Peter A Parks 2 weeks ago

    Are you able to see which cities in Ontario have the most or least residential building permits over the last 3 months that indicate growth or retraction if so can you share that data so we can see it.

    Thank you.

    • Brian 2 weeks ago

      Most in the City of Toronto, which basically has every high rise crane in the country operating. It’s also mostly investor demand that will be sold to end users as well. The primary reason the CMHC said Toronto is now at an oversupply risk.

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