Ottawa homebuilders putting brakes on new multi-residential projects: CMHC

Home construction
(Stock image for illustrative purposes only)

The city’s homebuilding industry is shifting gears in the first few months of 2018, collectively launching construction on more single-family and row houses at the expense of multi-residential projects, according to new figures.

The Canada Mortgage and Housing Corp. recently reported that the number of housing starts dropped in May, from 616 new homes in 2017 to 561 last month.

That’s a continuation of a trend seen since the start of 2018, with year-to-date starts down 17 per cent to 2,018 homes in the first five months of the year.

While the slowdown in homebuilding activity may seem counterintuitive given Ottawa’s relatively strong economy and a low unemployment rate, 2017 was described by some in the industry as a “catch-up” year. Builders increased the number of housing starts after several years of declined output that coincided with the cost-cutting initiatives under the former Conservative government.

Now, with homebuilding activity returning to normal levels, the industry is seeing a new trend as homebuilders shy away from starting new multi-residential projects and focus instead on launching construction of single-family homes.

Part of the story is that construction is wrapping up on many condo and apartment units. Since the start of the year, more than 800 apartment-style units have been completed, more than double the 305 units at the same point last year.

At the same time, only 523 such units have been launched in 2018 so far, less than half of the 1,229 apartment-style homes that had been started at the same point last year.

While single-family and row house completions are also up year-over-year, homebuilders are continuing to launch more of these projects, with year-to-date single-family home starts up by nearly a quarter to 773 units.

This shift mirrors the observations of some experts that the city’s housing stock is somewhat out of balance with market demand.

“The condo market is well-served … but there’s undersupply of every other type of home,” Ottawa Real Estate Board president Ralph Shaw told OBJ earlier this year.

Canadian market

Nationally, the pace of new housing construction in Canada slowed in May amid a double-digit decline in multi-unit projects in urban areas after several months of above-average activity, the CMHC said.

The federal agency's seasonally adjusted rate of housing starts for all of Canada – which is an approximation of how much construction will begin this year if the pace continues – fell to 195,613 units in May, from 216,775 units in April.

Quebec and Ontario, which one bank economist had their worst month for housing starts in a year, were a driving force that was partially offset by increases in six provinces.

May's decline pushed down the six-month average – which the CMHC considers a better indicator than a one-month snapshot – to 216,362 units on a seasonally adjusted basis from a six-month average of 225,481 units in April.

The primary reason for the month-over-month decline was that fewer condos, townhomes and other multi-unit projects started up in some urban areas in May.

CMHC chief economist Bob Dugan said May's decline in multi-unit urban starts "leaves them close to their 10-year average following several months of historically elevated levels."

The seasonally adjusted rate of multiple urban starts fell 16.4 per cent to 119,811 units in May while single-detached urban starts increased by 2.0 per cent to 58,390 units.

Rural starts were estimated at a seasonally adjusted annual rate of 17,412 units.

Nathan Janzen, senior economist at RBC Economics, noted that the decline in the multiple-unit starts wasn't spread evenly across the country.

"Regionally, there were big declines in Ontario and Quebec – both driven by big declines in multiple-unit starts – but increases in the Prairies and British Columbia," Janzen wrote in a research note.

He said the May dip probably reflects "normal" monthly volatility, rather than a deterioration in underlying trends, and the six-month moving average was still "elevated" at about 216,000.

However, Janzen said, there have been fewer home resales in the first months of 2018, following a series of rule changes intended to cool a hot market "and we expect that will eventually be followed by slower homebuilding as well."

Michael Dolega, senior economist at TD Economics, said the May slowdown wasn't surprising but "its magnitude is more pronounced that we had expected."

He said a decline of about 18,000 starts in Quebec and 14,000 in Ontario were the worst since May 2017.

More specifically, Dolega said multi-family unit construction in Toronto fell to 14,900 on a seasonally adjusted basis – the lowest in more than two years.

"In stark contrast, Vancouver's new home construction rose 14% in May to 26,500 – registering a pace faster than Toronto's for the first time this year," Dolega wrote.

CIBC economist Royce Mendes said the multi-unit market segment can be volatile "so a bounceback from these levels isn't out of the question.

"That said, with the implementation of the B20 (federal stress test) rules cooling demand for housing, we're still expecting only modest results from housing activity over the remainder of the year," Mendes concluded.

– With reporting by the Canadian Press