Canadian housing markets are experiencing an unprecedented surge in new housing starts, creating a scenario where an oversupply of homes may soon redefine the real estate landscape. The Canada Mortgage and Housing Corporation (CMHC) reported a substantial increase in new housing construction in September. While this surge in supply is generally positive for potential homeowners, it has raised concerns among investors, as the market faces one of the highest inventory levels seen in decades. This situation, if left unaddressed, may exert downward pressure on home prices, particularly if the existing housing market follows the same trajectory.
Unprecedented Rise in New Home Construction Nationally
The data from CMHC reveals that new housing construction in Canada has increased significantly, with a nationwide growth of 8 percent. The seasonally adjusted annual rate (SAAR) for new units reached 270,500 last month. This growth is primarily attributed to a 10 percent increase in multi-unit construction, which now boasts a SAAR of 207,700 units per month. Single-family units have shown improvement as well, with a 3 percent increase, reaching a monthly SAAR of 43,000 units.
Growing Inventory and Its Impact on Housing Prices
The rise in new construction is accompanied by a surge in existing home inventory levels, exerting pressure on housing prices. Despite substantial population growth, existing home sales have declined, contributing to this oversupply.
In September, Toronto and Montreal saw their housing stock surge by 20 percent and 98 percent, respectively. Vancouver, while experiencing a 37 percent increase compared to the same period in 2022, witnessed a 17 percent drop in housing prices in September.
Comparing the current scenario to pre-pandemic times, construction activity is significantly higher; however, home prices in these major markets are facing a downturn. Prices have decreased by 1.3 percent in Toronto, 0.6 percent in Montreal, and 0.4 percent in Vancouver, largely due to the increasing inventory of resale homes.
Impact on Investors and End Users
Investors who initially entered the housing market attracted by low-interest rates are now facing the consequences of declining prices and increased competition due to the influx of new supply. As existing home inventories continue to rise and new housing projects near completion, the gap between current home prices and what end users can afford is expected to narrow.
In conclusion, while the rise in new housing starts is a positive development for those looking to own a home, it has introduced challenges for investors. The unprecedented increase in supply and high inventory levels may exert downward pressure on housing prices in the near future. The evolving dynamics of the Canadian housing market will be closely monitored as it navigates this period of surplus inventory, affecting both investors and end users alike.
