Have We Been Starting Too Many New Homes in Canada? Nope – BMO

It seems that every time you open the newspaper (metaphorically speaking of course) there is another article warning of impending doom in Canada’s housing market. Sal Guatieri, Senior Economist at Bank of Montreal has released a short study on the issue. His findings mirror arguments we made not too long ago. Namely, that we are not building too many homes in Canada.

• While housing does account for a much large proportion of our GDP than it typically does, this statistic is misleading. It includes ownership transfer costs and renovation spending which has been steadily rising for years and is actually greater than spending on new housing construction
• The higher level of construction we are seeing follows a prolonged period with too little construction

The number of homes we are building needs to be viewed against the backdrop of recent population growth. In 2014, we started about the same number of homes that we historically have, given the population growth (see chart below).

But What About Condos?

A perfectly valid question. It is true that some areas, such as Toronto, have seen an elevated level on condominium apartment construction. But there are a few important things to point out:

• Developers don’t typically build on spec, meaning that most developments typically sell 70% of their units before a shovel hits the ground.
• Inventory levels picked up in the first quarter, but this was mostly due to a surge in completions, rather than a higher proportion of unsold units
• That being said, there are some markets, such as Saskatoon, Regina, and Montreal that are currently sitting on elevated levels of unsold inventory. It is likely that, in these markets, new apartment construction will slow as some demand is met with the existing stock.

Concluding Remarks

At the end of the day, real estate markets are local. As such, national averages are misleading as excess inventory in one market can hide a dearth of available stock in another. That being said, we view the Canadian housing market as generally healthy and providing the appropriate amount of new housing given demographic demands.