The Bank of Canada just marked down housing from growth engine to drag. In its quarterly monetary policy report, the central bank said residential real estate will subtract 0.1 percentage points from Canadian GDP growth this year, a sharp turn from January, when it expected housing to add 0.2 points.
The problem is not just weak resale activity. Canada’s condo machine is jammed, especially in major cities where small investor-friendly units were supposed to keep feeding the construction pipeline. March home sales were 20 percent below their 10-year average, preconstruction sales in Toronto are at their lowest level in more than three decades, and developers have already canceled or delayed dozens of projects.
- The six-month trend in housing starts fell 2.9 percent from February to March, according to CMHC.
- Toronto and Hamilton had a record 4,295 newly completed condo units unsold in the first quarter, according to Urbanation.
- Investors once made up at least 70 percent of preconstruction condo purchases in the Toronto region.
That last number is the stress point. Many mom-and-pop condo buyers are now stuck with units that cost more than comparable resale condos, rents that do not cover mortgage payments, fees and taxes, and prices that are no longer reliably rising. The Bank said a “substantial inventory overhang” of small condos in some major centres will restrain new construction.
Rates are no longer helping much. The Bank of Canada held its benchmark rate at 2.25 percent for a fourth straight meeting, but the oil shock from the Iran war has made cuts harder to deliver. Brent crude was around US$109 a barrel Wednesday, and Governor Tiff Macklem warned that persistent energy inflation could force the bank toward higher rates instead.
Governments are trying to clear the inventory with HST rebates on newly built homes, but the immediate issue is simpler: developers need buyers before they can justify new projects. The Bank’s forecast now calls for residential investment to stay subdued over the next two years, with housing demand growing only modestly and thousands more completed condo units expected to hit the market.
