Canadian Housing Starts Show Erosion

Canadian growth has been in its own trajectory with some solid consumer spending in gear and some slight slowing in GDP growth. Housing has begun to show some wear and tear in this environment even as mortgage rates have remained well off peak and have begun to stabilize around the 5% mark for 5-year mortgage financing.

Canada has been cutting its policy target rate faster than the Fed has been reducing the Fed funds rate. Canada’s unemployment rate has hovered above the rate for the US and it has been rising; rising - not quickly - but with a bit more purpose than in the US. This may have encouraged the Bank of Canada to cut rates more aggressively with inflation fluctuating is the desired range set by the back of Canada.

Canadian housing starts show the ‘signature slowing’ during Covid and the strong post-Covid recovery that actually has boosts starts well above the average it had maintained for the five-year previous to Covid. Even not with new episode of weakness in train Housing starts are above the pre-Covid average in Canada- and facing higher financing rates than before.

Canada, like the US, is going through some difficult fiscal times. In addition, there is an ongoing Trump-Carney spat that is a heavy overlay on the bilateral relations so important to both economies. Canadian PM Mark Carney just survived a confidence vote over his budget. The Carney budget aims to pump funds into the Canadian provinces to boost infrastructure and house-building. In Canada builders also face development fees that some want altered but the offer of reducing them has not been put on the table. Not surprisingly Canada is under some of the same pressure as the US for the government to act and supply answers for the housing shortage that has emerged. Carney’s platform on which he was elected had made some substantial promises and they still are not coming to fruition.

Covid seems to have upset a number of apple carts many of them related to housing. Prior to Covid housing demand had not been so vigorous. But Covid may have triggered something that reminded people how important housing can be especially in a crisis when you become house-bound. In the wake of Covid US and Canadian housing demand strengthened. And since the bank of Canada made the same policy mistake as the Fed driving interest rates to the brink of the zero bound during Covid it also created a period of super low mortgage rates which now has the effect of trapping people in their own homes- a form of "golden-handcuffs" that keep people in a house because of cheap financing. While mortgage rates are nearly 150bp below their post Covid peaks, they are still more than 100bps above their pre-Covid averages. The housing market remains under duress.