The Bank of Canada has promised to stop hiking interest rates. Housing developers are really hoping that’s true.
What happened: The annual pace of housing starts—a measure referring to the start of construction on new residential units—fell to 215,365 in January, down 13% from the month before, a number that was “well below expectations” per one TD economist.
That’s not great, since Canada needs more housing. It’s below the federal government’s target of building 350,000 new homes annually, and even further from the Canada Mortgage and Housing Corporation’s estimate of the 580,000 new homes actually needed per year.
So why are fewer homes being built? Bloated interest rates have made the prospect of building homes less enticing for developers. The cost of borrowing money has increased to a point where it’s not viable to commit to new homes since they aren't selling like they used to.
- Last month, home sales fell 37% year-over-year, the housing market’s worst start to a year since 2009 (which, as you may recall, was during a global financial crisis).
The shockwaves are starting to ripple across the industry. Coromandel Properties, a Vancouver real estate developer, filed for creditor protection in the face of high interest rates.
Why it matters: The housing conundrum shows us how the rate hike equation isn’t as simple as higher rates = less demand = more affordability. It’s more like… higher rates = less supply + higher mortgage standards + a historically tight rental market + a housing market on its way to bottoming out = ¯\_(ツ)_/¯ affordability.