Canada’s new construction housing market could be hitting a wall, thanks to higher interest rates: TD

There was a slight increase in Canadian housing starts in November, the second month of strong activity for the homebuilding sector. But according to economists, the solid performance could hit a wall in 2019.

“On a trend basis, housing starts appear to have troughed, with some upward momentum of late,” writes Fotios Raptis, a senior economist with TD, in his most recent note.

Housing starts reflect the number of new homes that have started construction during a given month. They’re an important indicator of both the health of the new homebuilding market, and a way to track the growth of new housing supply in the Canadian housing market.

While housing starts won’t decline in the new year, there’s a good chance that they’ll begin to plateau, writes Raptis. The reason? A series of policy measures introduced in 2018 that could prove to be major headwinds to the homebuilding sector.

“Going forward, higher interest rates and affordability constraints in major [markets] (GTA, Greater Vancouver Area) could act to hold the pace of new residential construction,” he writes.

There’s been a good deal of talk about what higher interest rates will mean for the Canadian housing market in the new year. The Bank of Canada hiked the overnight rate to 1.75 percent in October, and has indicated its intention to do so again in 2019. The higher rate environment could pose a challenge to new home builders, limiting the number of starts next quarter.

Royce Mendes, a senior economist with CIBC, has also written about the potential impact of higher rates on the sector.

“Following a strong 2017, homebuilders are feeling the pinch of higher interest rates and tighter lending standards,” he writes, in his most recent note.

But both economists are quick to note that new construction starts will only plateau in the new year, and a serious dip in new construction homes is unlikely.

“A steep downturn in homebuilding nationwide appears unlikely,” writes Raptis. “Canada’s population is on the rise, medium-term income growth should remain healthy, and most markets are generally not overbuilt.”

Sarah Niedoba