Canada now building fewer homes than during pandemic shutdown

A new report has painted a grim picture of Canada’s housing construction.

The Canadian Centre for Policy Alternative has revealed the country’s new housing construction levels are lower than during the worst point of the COVID-19 economic shutdown.

The report indicates a significant reduction in investment across various housing sectors since April 2020 — which marked the peak of the pandemic-induced economic downturn.

For instance, investment in new single-family homes has shrunk by a substantial 21%. New row home construction isn’t faring much better, with an 8% decline, and new apartment construction has witnessed a 2% decrease.

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The situation takes a bleaker turn when we compare the numbers to February 2022, when interest rate hikes in Canada began. Investment in single-family homes has nosedived by a staggering 36%.

Semi-detached houses have suffered a 27% drop. In contrast, the decline in new row home construction is more modest, standing at just 2%. Apartment building construction, however, bears the brunt of the decline, plummeting by 19%.

These numbers have far-reaching consequences, not only for the housing market but also for Canada’s economy as a whole. The real GDP has shown no growth from January to July 2023, largely due to the significant dip in residential investment.

David Macdonald, the report’s author, offers a cautious prediction for the future. He points out that the Bank of Canada estimates it takes two years for the most severe impacts of interest rate increases to hit the housing sector. Given that it’s been 18 months since the initial rate hikes, with the most substantial increases occurring in the last 12 months, the worst may be yet to come.

The Bank of Canada has been on an interest rate-raising spree, increasing rates from 0.25% to 0.5% in March 2022, followed by another boost to 1% in April.

Rates continued to surge throughout the summer, peaking at 3.25% by September 2022. This represents a total of 10 interest rate hikes since March 2022, bringing it to the highest level since 2001, currently standing at 5%.

While there was a brief uptick in new construction, especially in row houses and apartments during the summer of 2022, all major housing unit types saw declines by the end of the season.

Macdonald suggests that, given the higher interest rates, it’s time for governments to shift their focus towards filling the void left by the faltering private sector investments in housing construction.

He advocates for a more hands-on approach, asserting that the federal government should take a leading role in directly building non-market housing or buying and converting units to non-market rent.

These solutions are longer-term in nature and may require a considerable time investment, often taking up to a decade from land acquisition to occupancy, or five years if everything aligns perfectly.

The report underscores that the most substantial impact of rising interest rates is on housing-related sectors, such as construction, renovations, and homeownership transfer. Additionally, it affects industries connected to major purchases financed through loans, such as the automotive sector. Housing construction businesses, in particular, frequently accumulate significant debt during project completion before selling.