Canadian home builders have been putting up impressive numbers even as the COVID-19 pandemic has disrupted so many other industries and some segments of the real estate industry itself.
Although Canadian housing starts data released today points to steady home construction activity on the national level, TD economist Rishi Sondhi believes the industry could still struggle with the pandemic’s impact in both the near and medium-term.
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The Canada Mortgage and Housing Corporation (CMHC) published its monthly housing starts data for May today, with Sondhi calling the 193,500 annualized units “reasonably healthy” and noting the total was slightly below the six-month average. He also said the figure, while soft, was far better than what was observed during the 2008-2009 Financial Crisis.
Housing starts measure how many homes began construction during a given period and are generally viewed as a key factor in determining market health.
While Sondhi was relatively upbeat in his analysis of the CMHC data, he pointed to two weak spots that could indicate the effects of the pandemic have yet to be fully felt by Canadian home builders.
“It’s fair to question how long this resilience will hold up. Permit issuance pulled back sharply in April, which could flag near-term weakness ahead. Looking further out, the prospect of significantly slower population growth in coming quarters dims the medium-term prospects for homebuilding,” wrote Sondhi.
The TD economist said that homebuilding “is in part a function of past housing demand.” With the market in such a strong position before the pandemic struck, the impact of the demand from that period is still being realized in today’s housing starts data.
As Sondhi noted, building permits, which are a key indicator of where housing starts figures are headed, were down in April. However, when it comes to a longer time horizon, population growth is regarded as the more important data point to examine.
Strong population growth is the major driver of housing demand in Canada’s largest markets. Immigration, in turn, drives population growth, with many newcomers settling in hub cities like Toronto and Vancouver.
In a survey released in fall 2019, Royal LePage found that about one-in-five home purchasers were Canadian newcomers and that this group would purchase 680,000 homes over the next five years should immigration trends remain consistent.
With immigration significantly disrupted by the pandemic, it remains to be seen how quickly it will be able to return to past levels, and, as Sondhi mentioned, this diminishes the ability for Canadian home building activity to stay resilient in the medium-term.