Canadian Housing Supply Targets Don’t Make Sense, “Will Never Be Hit”: BMO

Canadian policymakers are sprinting across the country to rain cash to stimulate homebuilding. Unfortunately, it’s not working with new housing starts actually falling further from targets in January. BMO wrote to investors to explain this is predictable, since the targets were unrealistic and will never be hit. Partially due to the lack of resources available to build at that scale, but also the fact that homebuilders build for the market, not policymakers. 

 

Canadian Housing Starts Slowing, But Remain Robust

Despite the slowdown of new home starts, builders are moving at a brisk pace. The seasonally adjusted annual rate (SAAR) of new home starts fell 10% to 224k units in January. It’s a substantial drop, continuing the trend that began after running out of steam in early 2022. However, these levels are robust and remain significantly higher than anything seen over the past two decades. 

Canadian Housing Starts (SAAR)

Source: CMHC; BMO. 

“This is still a robust level of building activity for Canada, especially considering some of the shocks that have been thrown at the market and homebuilders,” explains Robert Kavic, senior economist at BMO.  

Adding, “That said, it’s also still miles below the supply targets that policymakers have dreamed up—we maintain that those will never be hit.”

Home Builders Build For The Market, Not For Policymakers

The bank notes the collapse in new housing starts occurred at a somewhat ironic time. They peaked around Ottawa’s 2022 budget, which was chock full of stimulus measures to encourage more supply. Instead it marked the top of the trend, which doesn’t surprise Kavcic. 

“At the end of the day, builders will respond to market conditions—they were already maxed out in 2021/22, and have since pulled back given less investment demand (presales) and higher borrowing costs,” he says.

“In fact, even job vacancies in construction have fallen notably, and there’s talk that building costs are also finally coming down.” 

The bank has provided no shortage of data points challenging the housing narrative. Kavcic has argued that housing supply kept up until very recently, when it was intentionally overrun. A point later confirmed by Statistics Canada in detail. 

Kavcic also has said a number of times that the housing targets policymakers dreamt up are unrealistic and not rooted in reality. Even if they go on cross-country tours to repeat it over and over to the public.