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The Globe and Mail

Why Canada will take slowdown in housing starts in stride

The now-apparent slowdown in Canadian housing starts was long overdue. But there is little reason to believe it will be long-lasting.

Figures released Thursday by Canada Mortgage and Housing Corp. showed that housing starts were at a 204,000 annualized pace (seasonally adjusted) in October, down dramatically from 224,000 in September. In the past two months, the pace of starts has fallen 11 per cent.

Coming as it does in the wake of recent data showing declining sales, sluggish prices and slumping building permits, the numbers seem to underline a snowballing correction in Canada's housing market. It's something that many pundits believed was inevitable, given alarmingly high levels of Canadian household debt, continued economic instability, and the fact that Canada was one of the few industrialized economies in the world that had eluded a housing correction in the Great Recession.

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Indeed, Canada has spent the past four years building houses at a seemingly unsustainable pace, considering the surrounding global economic conditions. Since the financial crisis hit four years ago, the country has churned out homes at an annualized rate of 185,000 units – actually exceeding its 20-year average. This year, Canadian starts have averaged nearly 220,000 annualized.

If we put those numbers in the perspective of our U.S. neighbours, they look positively gaudy. Going by the typical rule of thumb that the Canadian economy is roughly a 10th the size of the U.S., Canada's average annualized housing starts since the financial crisis would equate to a 1.85-million-starts-a-year pace in the United States. In reality, the U.S. pace has averaged a paltry 615,000 – equivalent to just 61,500 starts a year in Canada. (September's U.S. starts number of 872,000 was the highest in more than four years.)

But by the same token, Canada's housing market hasn't been anywhere near as oversupplied, relative to consumer demand, as the United States was when its housing market collapsed – nor is it as oversupplied as the U.S. market still is today.

Based on the current pace of sales, Canada has a little over six months' supply of homes on the market – elevated from its historical norm of closer to four months, yet still down considerably from its peak of more than nine months at the end of 2008. The Canadian Real Estate Association considers the current supply to be in "balanced market territory."

After four years of depressed housing starts, the U.S. market has a similar six-month inventory of homes for sale – down drastically since July, 2010, when there was more than 12 months of supply on the market. However, the U.S. market is also encumbered with a massive so-called "shadow inventory" – homes on which banks have foreclosed, but have been kept off the market while the banks wait/hope for better prices. Some estimates put the total U.S. inventory of unsold homes, including the shadow inventory, at a daunting 16 months. This is the glut into which U.S. builders are now constructing growing numbers of new homes.

Canada's current pace of home building is about in line with its average over the past 10 years, and the market certainly doesn't look wildly oversupplied. Granted, some further moderation in housing starts is entirely likely, as a soft economy and the federal government's tighter rules on mortgage lending take their bites out of consumer demand. But there is no glut here – and no reason to anticipate that a U.S.-style long-term building slump is headed north.

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