New home construction in Toronto peaks in June, but for how long?

The torrid 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, some economists say.

“Long term, I think the homebuilding market will remain strong, but over 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, assistant professor at Western University’s Ivey School of Business.

On Monday, CMHC said new housing starts in the Toronto area reached 49,860 in June, a 27% increase from May’s 39,381.

Across the country, there are already signs of a slowdown in housing construction. Nationally, there were 273,841 housing starts in June, down 3% from 282,188 in May.

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

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

Last week, the Bank of Canada shocked observers by raising its key overnight rate by one percentage point to 2.5%, a huge change from the 0.25% rate it started at. the year. The Bank of Canada has also hinted that it should raise rates again before the end of the year.

Most economists and banking watchers were expecting a three-quarters of a percentage point increase.

BMO senior economist Robert Kavcic agreed there may well be a slowdown in construction, driven in part by rate hikes but also by falling resale home prices.

“The interesting part will be how construction reacts to higher interest rates, squeezed margins and a sharp, sharp decline in resale demand. We could very well start to see project cancellations and a decline in activity over the next year,” Kavcic said in a Monday research note examining CMHC data.

But, he added, there is no immediate sign that the slowdown in resale home prices is shifting to new construction.

“Overall, unlike the resale market, new construction activity is strong – but this segment of the market is lagging, so any cracks would realistically only start to show in the data later. within the year,” Kavcic said.

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

“The Bank of Canada’s 100 basis point rate hike sets us up for an even deeper housing correction over the next year. The fact that the market had already cracked after the Bank of Canada’s initial rate move 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 stark in multi-unit buildings such as condos, where builders typically only proceed with construction after the majority of units are paid for, according to CMHC’s Chris Zakher.

“A lot of this product was sold before construction, which really reflects demand and sales two or three years ago,” said Zakher, a CMHC Toronto market analyst. “This is a lagging indicator.”

Still, even if new home construction drops, there will still be plenty of long-term demand, argues Phil Soper, CEO of real estate giant Royal Lepage.

Immigration is starting to rebound to pre-pandemic levels, Soper said. The same is true for the number of international students attending Canadian universities. Both, Soper said, are driving demand for condos, in particular. The same goes for the fact that many office buildings are gradually reopening; people who ditched their downtown condos and bought a house with a yard in a small town during the pandemic are starting to come back.

“People are coming back to the office, even if it’s two days a week,” Soper said. “And they find it difficult to live in St. John if they have to be in Toronto two days a week.

JOIN THE CONVERSATION

Conversations are opinions of our readers and are subject to the Code of conduct. The Star does not share these opinions.