Photo: Colin Knowles
As home construction across Canada skyrocketed last month, the level of building activity seen in the condo segment of the country’s hottest housing market has a leading economist voicing concerns.
“Starts in British Columbia surged to the highest level since 1990, while Vancouver saw the strongest level of condo starts on record,” says Robert Kavcic, a BMO economist, in a research note today, following the release of Canada Mortgage and Housing Corporation’s (CMHC) latest housing starts survey.
“We’ve long been defenders of the Canadian housing market against the rabid bears, but activity in Vancouver at least is making that case a lot tougher to make,” he says.
Housing starts, which mark the point when construction begins on a residential project, leapt to a seasonally adjusted annualized rate (SAAR) of 50,780 urban units in BC last month, up from 31,633 in January, according to CMHC.
Vancouver activity made up the most of this, especially the multi-family corner of the market which includes housing types such as condo apartments and townhouses. In fact, excluded single-detached homes, the SAAR of starts was 31,140 last month, well above the 16,728 recorded a month earlier.
The SAAR shows what the total number of starts would equal in a year if a given month’s pace persisted for 12 months.
Kavcic points out that “previously well-behaved condo prices in the city have exploded” following the Bank of Canada’s cuts to the key interest rate, even as construction of new condo units continues to ramp up.
“The concern here is that this segment of the market does not share the same degree of supply-side constraints as the detached markets in Vancouver and Toronto, so heated price gains are less justifiable,” says Kavcic.
“In fact, this month’s starts tally (if it doesn’t prove temporary), suggests that the supply side of the condo market is set to deteriorate — there were already a record number of units under construction in January, and we’ve just added significantly to that tally,” he adds.
Across all housing types, starts equalled a SAAR of 37,233 units in Vancouver, a level Kavcic says “is not sustainable, and if not reversed in the months ahead, will start flashing a pretty clear warning sign.”
Meanwhile, across Canada, housing starts increased to 212,594 units on a seasonally adjusted basis, up from 165,071 in January, according to the national housing agency.
“Keep in mind that the jump follows back-to-back soft readings of 172.8k and 165.1k in December and January, respectively, leaving the three-month average (183k) tracking right in-line with household formation,” says Kavcic.
Projects for urban multi-family dwellings drove much of the growth, as these starts reached a SAAR of 138,774 units in February, compared to 95,063 the month before. Meanwhile, the SAAR of urban single-detached housing starts was 61,457 last month, up from 57,908 in January.
The SAAR of urban starts in February rose in British Columbia, Ontario, Quebec, and Atlantic Canada. “The balmier-than-normal weather in Central and Atlantic Canada (and that’s an understatement) certainly didn’t hurt,” notes Kavcic.
Ontario led the way for urban starts last month, as contractors broke ground for a SAAR of 76,600 homes, compared to 57,370 a month earlier.
Across the prairie provinces (Alberta, Manitoba, Saskatchewan,) urban starts fell to a SAAR of 28,652 units in February, down from 29,276 in January. Kavcic says it’s a sign of things to come.
“The precipitous drop in Alberta building is now reflecting much weaker demand conditions in the province,” he explains, adding, “With the jobless rate still rising and migration flows likely to turn negative, residential prices and construction activity should remain under pressure through the rest of the year.”
The increase in the SAAR of housing starts follows a decline in the value of residential building permits that municipalities issued across the country in January, according to Statistics Canada numbers also posted today.
At $4 billion, the overall value of this paperwork — which builders need to start construction work — was down 12.5 per cent from December 2015, when there was an 11.5 per cent increase.
The multi-family segment experienced the largest decline in January, with the value permits for this housing type falling 21 per cent to $1.8 billion.
The most substantial decline was in Ontario, where residential permits issued amounted to about $1,480,800, an 18.5 per cent month-over-month drop.