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A surge in apartment construction helped Canada’s major cities register a one per cent uptick in housing starts in the first half of 2023, but higher financing and building costs could signal a slowdown is ahead, the country’s national housing agency said.

According the Canada Mortgage and Housing Corp.‘s (CMHC) semi-annual Housing Supply Report (HSR), starts in the country’s two biggest markets, Toronto and Vancouver, were up 32 per cent and 49 per cent, respectively, to 25,768 and 17,458 units in the first half of the year.

Apartments dominated these figures, constituting nearly three-quarters of all new developments. Toronto also witnessed a resurgence in purpose-built rental starts, which hit their highest level in decades and contributed more to the overall growth in apartment starts than condos. Meanwhile, Vancouver’s apartment boom was driven by condominium starts, which surged by 91 per cent from 2022 levels.

However, the pronounced growth in the two largest markets was neutralized by declines in Canada’s other primary centres. Specifically, apartment construction totals in Montreal and Edmonton were down by 57 per cent and 38 per cent, respectively.

Kevin Hughes, CMHC’s deputy chief, said the divergence was likely due to longer project lead times in Toronto and Vancouver.

“Given larger building size and resulting longer preparation time of the buildings started in Toronto and Vancouver, the numbers posted in these cities are the result of a process that began at a time when financing and building conditions were considerably more favourable,” Hughes said in a press release for the report. “This contrasts with Montreal, which is more reflective of the current, more challenging, context.”

In the report, the agency says it anticipates a slowdown in Toronto and Vancouver as the year progresses, due to rising material, labour and financing costs.

“In 2023, growth in construction costs has slowed to varying degrees across all major centres, but remains elevated in Toronto and Vancouver…. In contrast, it has slowed much more in the centres that saw steady or declining starts,” the report said.

“Right now, in the inflationary context it is really much more difficult for people to get their financing so we’re probably going to see some delays definitely in several projects,” Hughes said. “Financing is one of the issues but it is not the only one.”

The report comes on the heels of a series of measures implemented by the federal government to support increased housing supply. On Sept. 26, the Department of Finance announced the annual cap for Canada Mortgage Bonds would be raised from $40 billion to a potential $60 billion, a move aimed at assuring builders that more low-cost financing will be accessible, especially for rental projects.

The increase closely followed a legislative move on Sept. 21 to waive the federal component of the Goods and Services Tax (GST) on new purpose-built rental housing projects.

Earlier this month, CMHC disclosed that at least $1 trillion in investment is needed to achieve housing affordability in Canada, and last month the agency confirmed that Canada still needs about 3.5 million additional homes on top of current construction rates to close the affordability gap by 2030.

Hughes said that governments alone cannot tackle the affordability challenge single-handedly, despite the recently introduced measures.

“There needs to be involvement at all levels,” he said.


Story by: Financial Post