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Builders work on the roof of a home in a new subdivision in the Ottawa suburb of Kanata, on July 30, 2021.Justin Tang/The Canadian Press

Canada’s housing agency predicts that home building could plunge 32 per cent this year, calling it an “alarming” situation given the dearth of affordable places to live in the country.

The rising cost of building materials, a shortage of construction workers and higher interest rates mean housing starts could drop 19 per cent year-over-year under the current conditions, Canada Mortgage and Housing Corp. said in its annual housing market outlook, released Thursday. But if inflation persists and interest rates remain high for longer than expected, housing starts could drop as much as 32 per cent to 176,890 units, the agency said.

Residential building costs are up almost 20 per cent over the past year, according to Statistics Canada.

CMHC chief economist Bob Dugan called the decline “alarming” and said the climate is “inhospitable” for new construction. He said a “call to arms” is needed to boost home building and warned that affordability will continue to worsen if the country’s housing stock does not increase.

“We need a much higher level of starts if we want affordability to improve,” Mr. Dugan said on a call with reporters to discuss the outlook. He said housing starts have to double from 2021′s record level, when ground was broken on 271,198 new units.

But real estate experts have said it will be difficult to boost home building given the multitude of other infrastructure projects sucking up experienced tradespeople.

And with the spectre of higher interest rates still present, builders are wary of breaking ground on rental apartment buildings because the profit margins are so thin.

“In principle, we would not start a purpose-built rental apartment project with a backdrop of interest rates in an upward trajectory and until inflation is steadied,” said Clemens Sels, the president of Colonia Treuhand Ltd. Group, which has been developing real estate in Southern Ontario for 50 years.

In the meantime, competition for housing will continue to increase as the federal government boosts immigration targets to a record 1.45 million new permanent residents over the next three years. That has kept home prices from falling further after the Bank of Canada hiked interest rates to slow inflation.

The national average home price was $686,371 last month. That’s 14 per cent below March of last year but almost $75,000, or 12 per cent, higher than this January, according to the latest data from the Canadian Real Estate Association.

CMHC expects the average price for the year to be about 9 per cent lower than the 2022 average, although the agency predicts that prices will bottom out over the next two months. Home prices have already started to climb in the Toronto region, as well as in Chilliwack, B.C., and other markets that saw the greatest price increases when borrowing costs were near zero. Realtors have reported that bidding wars are back amid a shortage of homes for sale.

CMHC said the economy could dip into a mild recession this year and predicted that the central bank will start cutting its key interest rate early next year. As mortgage costs fall, it forecasts that home prices, along with the volume of sales, will rise over 2024 and 2025.

Higher borrowing costs have priced some would-be buyers out of the market, forcing them to continue renting. That has reduced the number of rental units available and contributed to rising rental rates. CMHC predicts that trend will continue for most of the country’s major cities, including Victoria, Vancouver, Edmonton, Calgary, Regina, Toronto, Ottawa and Montreal.

“Rental market conditions are expected to further tighten, placing significant upward pressure on rents,” the outlook said.

In Toronto, the country’s largest city and job market, the average monthly rent for an apartment built after 2005 topped $3,000 in March, a record high, according to Urbanation Inc. research.

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