By Paul Vieira
OTTAWA--Canada Mortgage and Housing Corp. predicted on Thursday a decline in housing starts this year from 2023 due to high interest rates making some residential projects financially unfeasible.
The government agency, in its latest market outlook, also anticipates home prices to rise gradually and return to peak levels hit in 2022--prior to rapid-fire interest rate increases from the Bank of Canada--on the strength of lower mortgage rates, solid gains in population growth and after-tax income, and a shortage of housing supply. Existing-home sale activity should rebound in the second half of this year, on the expectation that the Bank of Canada begins cutting rates, CMHC said.
The outlook indicates that Canadian policymakers face immediate headwinds in efforts to ramp up housing construction, in a bid to make real-estate more affordable for a younger cohort of Canadians. In the past two weeks, Canadian Prime Minister Justin Trudeau--struggling in public-opinion polls--has unveiled multibillion-dollar initiatives, among them increasing by a third loans available for rental-apartment construction with less-strenuous terms, to spur the building of housing units. Financial and polling data show younger Canadians are abandoning plans to buy a home.
CMHC has previously said the country needs 3.5 million new homes, above what's currently forecast for construction, to bring house prices down to what it considers affordable levels, or when shelter accounts for no more than 30% of pretax income. The vacancy rate in Canada hit a record low in 2023 of 1.5%.
"We are experiencing a housing crisis in this country," Canada's Housing Minister Sean Fraser said. The government also unveiled plans to make new loans available to nonprofit groups to help preserve rents at current levels and to acquire new units.
CMHC said it expects total housing starts in 2024 to reach 224,000, a 6.6% drop from the year prior. The most recent data indicate the six-month moving average of seasonally adjusted, annualized housing starts edged upward 0.4% to 245,665 units in February. Purpose-built rental-housing starts accounted for over half of new construction in 2023.
However, "unfavourable financing conditions are expected to make more new rental projects unfeasible in 2024," CMHC said. The agency said condominium projects also face delays, with high mortgage rates dampening pre-construction sales. Generally, condo developers won't commence construction until the project's units are mostly sold.
Starting in 2025, CMHC expects housing starts to accelerate, due in part to lower interest rates, slower growth in construction costs, and tens of billions of dollars in financial support from the government. A majority of economists expect the Bank of Canada to begin rate cuts as early as June, given that inflation is showing signs of deceleration and tepid private-sector activity.
The CMHC's forecast indicates a rebound in existing-home sales over the next three years. Sales dropped about a third from a 2021 peak to the end of last year, and prices fell from 15% in the same period. "As mortgage rates and economic uncertainty decrease in the second half of 2024, we expect buyers to start returning to the market," CMHC said, adding that growth in incomes and an expanding population would help stoke housing-market activity.
Average house prices in Canada fell last year to about 680,000 Canadian dollars, or the equivalent of $500,000. CMHC expects the average price to climb 4.5% this year, and another 10% next year, to about C$780,000.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
04-04-24 1238ET
