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Modeling suggests interest rates in 2023 would reduce housing starts by 10 to 15 percent
Published on Oct 3, 2024 • Last updated 2 days ago • 2 minutes reading time
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According to CMHC, housing starts in Canadian centers with populations of 10,000 or more fell seven per cent in 2023. Photo by Derek Baldwin /Postmedia
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Canada's housing crisis deepened last year as higher interest rates slowed the pace of housing starts by an estimated 30,000 units, the Canada Mortgage and Housing Corporation (CMHC) said Thursday.
Actual housing starts in centers with 10,000 residents or more fell seven percent in 2023, with 223,513 units registered, compared to 240,590 in 2022, CMHC data shows.
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However, the group's modeling suggests that high interest rates reduce the potential average total of about 250,000 starts by 10 to 15 percent.
Condominium construction has been particularly hard hit, with the exception of Alberta, noted CMHC deputy chief economist Aled ab Iorwerth, citing the company's most recent housing supply report.
The report found that the number of housing units under construction but not yet completed reached a record high in several census metropolitan areas (CMAs) at the end of 2023. And in the first half of 2024, condominium construction starts declined across Canada (outside Calgary and Edmonton).
Ab Iorwerth fears that new starts in Toronto are “not yet reflecting the full impact” of higher interest rates because there is a large market for condominiums there.
And while he expects the Bank of Canada's move to lower interest rates could boost housing supply next year (total housing starts in the six largest CMAs rose slightly in the first half of 2024), he still has concerns regarding the future.
“Canada faces a critical long-term housing shortage,” he wrote.
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Ab Iorwerth believes Canada's housing crisis can only be solved through significant investment from the private sector, which provides about 95 percent of all housing in Canada.
However, the private sector is particularly sensitive to changes in the economy, particularly changes in interest rates.
Developers rely on funds from potential buyers who either rent out or occupy condominiums and typically borrow money to finance these purchases. But they will only move forward with construction if about 70 percent of the units are pre-sold, ab Iorwerth said.
So if these buyers are reluctant to borrow given higher interest rates and financial institutions are reluctant to lend, developers are less likely to build.
That means “all levels of government must ensure that the private sector can build as much housing as possible when things are going well and interest rates are low,” said ab Iorwerth.
Shorter approval times and reduced uncertainty could help improve efficiency, but ab Iorwerth also called for frameworks to be designed to ensure that housing construction continues even when interest rates are high.
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In April, the government announced it would set up a working group to examine domestic investment opportunities for Canadian pension funds, such as housing.
“Developing ways in which long-term patient capital can be used to address Canada’s long-term housing shortage will undoubtedly be important,” ab Iorwerth said.
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