Toronto new home construction spikes in June, but for how long?

The breakneck pace of new home construction in the Toronto area continued in June, according to new data from the Canada Mortgage and Housing Corporation.

But that could soon be coming to an end, according to some economists.

“Long-term, I think the home construction market is going to remain strong, but the next six to 18 months, there will be some weakness. We’re not going to see numbers like this continue,” said economist Mike P. Moffatt, an assistant professor at Western University’s Ivey School of Business.

Monday, the CMHC said new housing starts in the Toronto area hit 49,860 in June, a 27 per cent rise from May’s 39,381.

Across the country, there are already signs of a housing construction slowdown. Nationally, there were 273,841 housing starts in June, a three per cent drop from May’s 282,188.

Rising interest rates, prompted by the Bank of Canada’s efforts to slow down runaway inflation, will likely prove to be a double-whammy for homebuilders, Moffatt argued.

“Not only are their financing costs for projects going up, there’s also lower demand from consumers,” said Moffatt. “It will be interesting to see what happens in the fall.”

Last week, the Bank of Canada shocked observers by hiking its key overnight lending rate a full percentage point to 2.5 per cent, a huge change from the 0.25 per cent it began the year at. The Bank of Canada also hinted it would need to raise rates again before the year is out.

Most economists and bank watchers had expected an increase of three quarters of a percentage point.

BMO senior economist Robert Kavcic agreed that there could well be a slowdown in construction, prompted partly by rate hikes, but also by falling prices for resale homes.

“The interesting part will be how construction responds to higher interest rates, compressed margins and a clear sharp pullback in resale demand. We could very well start to see some project cancellations and a pullback in activity through next year,” Kavcic said in a research note Monday looking at the CMHC data.

But, he added, there’s no immediate sign that the slowdown in resale housing prices is moving to new-builds.

“All in, unlike the resale market, new building activity is running strong — but this segment of the market lags, so any cracks wouldn’t realistically begin to show in the data until later in the year,” Kavcic said.

On Sunday, Kavcic said the Bank of Canada rate hike is “hammering” the resale market.

“The Bank of Canada’s 100 bp rate hike sets us up for an even deeper correction in housing through next year. The fact that the market had already cracked after the BoC’s initial move in rates only reinforced how sentiment-driven the market was, and how quickly that can change,” Kavcic said.

The lag between the resale market and new home construction is particularly keen in multiple unit buildings such as condos, where builders typically only go forward with construction once the majority of units are paid for, according to Chris Zakher of the CMHC.

“A lot of this was sold pre-construction, so this really reflects demand and sales from two or three years ago,” said Zakher, Toronto market analyst at the CMHC. “This is a lagging indicator.”

Still, even if new home construction dips, there will still be plenty of demand in the long run, argues Phil Soper, CEO of real estate giant Royal Lepage.

Immigration is starting to bounce back to pre-pandemic levels, Soper said. And so are the numbers of international students attending Canadian universities. Both, Soper said, drive demand for condos, in particular. So, too, does the fact that many office buildings are gradually reopening; people who ditched their downtown condos and bought a house with a yard in a smaller city during the pandemic are starting to come back.

“People are coming back to offices, even if it’s two days a week,” said Soper. “And they’re finding it difficult to live in St. John if they’ve got to be in Toronto two days a week.”

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