Higher interest rates hit condo construction, but declining rates could boost housing supply next year
Canada Mortgage and Housing Corp. (CMHC) has reported that higher interest rates led to a reduction of about 30,000 housing starts last year.
The national housing agency noted a 10 to 15 percent decrease in new construction starts in 2022. As per CMHC deputy chief economist Aled ab Iorwerth, this slowdown is attributed to the impact of rising interest rates on condominium buildings across most regions in the country.
Although the higher interest rates slowed construction, CMHC indicated that other economic factors and government policies to support rental building construction helped offset the effects.
According to BNN Bloomberg, fixed-rate mortgage rates increased during 2022 and 2023 as the Bank of Canada raised its interest rate target to control inflation. However, mortgage rates have started to decline as the central bank cut rates earlier this year and is expected to continue doing so.
ab Iorwerth discussed in a report by CMHC the challenges of addressing housing supply issues, noting that the private sector plays a crucial role in increasing housing supply and enhancing affordability in Canada.
He emphasized that interest rates have significantly affected different types of housing, particularly condominium buildings. CMHC's data showed that higher rates reduced housing starts by approximately 30,000 units in 2023, representing a decrease of about 10 to 15 percent in overall starts.
As noted by CMHC, housing supply has been particularly impacted by the higher interest rates in cities like Toronto, where the full effect of the rate increases has yet to be fully realized.
However, CMHC expects that the move toward lower interest rates will help stimulate housing construction in the coming year.
The private sector is vital to addressing Canada's housing supply challenges, with both small and large investors playing significant roles in financing condominium apartments and purpose-built rental buildings.
According to the report, developers typically proceed with construction when about 70 percent of condominium apartments are presold, and individual buyers or investors rely on borrowing to purchase these units.
The willingness of financial institutions to provide credit to developers also impacts decisions on whether to proceed with large rental building projects.
The sensitivity of housing supply to interest rates is clear, with different effects on condominium and rental starts. Recent increases in interest rates, as outlined by CMHC and reported by BNN Bloomberg, resulted in a reduction of around 30,000 housing starts out of the annual average of approximately 250,000.
While higher rates caused a slowdown in condominium construction, rental building construction remained relatively strong due to government policies and economic factors.
According to CMHC, Canada's long-term housing supply issues require substantial investment from the private sector, which provides about 95 percent of housing in the country.
Addressing the affordability challenges for the middle class, whether for ownership or rental, depends on private sector participation. However, the sector is highly sensitive to economic changes, especially fluctuations in interest rates.
Efforts to ensure that the private sector can continue building during periods of lower interest rates are essential. Reducing regulatory barriers, improving approval times, and increasing certainty for developers are critical steps in enhancing the responsiveness of the housing market.
Additionally, the federal government recently announced a working group to explore domestic investment opportunities for Canadian pension funds, aiming to direct long-term capital into addressing the country's housing shortfall.
