Fewer new homes are being built in Canada now, and mortgage rules and affordability are to blame

Canadians who are looking to buy homes aren’t the only ones feeling the pinch from mortgage rules the federal government brought in last year.

The rate of homebuilding in the country took a surprising tumble in February, and it’s related to mortgage stress testing, which raises requirements to qualify for a loan, says a leading economist.

“Residential construction, which remained firm through much of last year, has shown signs of slowing with the double whammy of tougher mortgage rules and poor affordability in major markets,” writes BMO Chief Economist Douglas Porter in a response to preliminary housing start data from the Canada Mortgage and Housing Corporation.

“While February was a bad weather month, the more complex adjustments in the housing market have worked to slow residential construction,” Porter continues.

In February, housing starts, which are roughly measured when work begins on a home, contractors broke ground for 10,384, down 29 percent from that month last year. At an annualized rate — so if this pace continued — homebuilders would start construction on about 173,200 homes, down 16 percent compared to January’s pace.

The slowdown was widespread. Nova Scotia was the only province in which housing starts increased.

In Ontario, the most populous and active homebuilding province, housing starts are around normal levels despite recent declines.

“The 12-month moving average now hovers near 75k annualized — not too far from the trend of around 80k per year — but there is clearly a downward shift,” Porter explains.

Meantime, in a separate note, Robert Kavcic, Porter’s colleague and a senior economist, notes residential investment, including new construction, home sales, and renos, has dropped 7.5 percent from a year before.

Such a decline is nothing to sneeze at. “Historically, declines of this magnitude have usually correlated with a broader recession,” he says.

But don’t expect a crash in residential construction this year. Porter suggests employment and population growth are too strong for that to happen.

“But, with fastest population increase since the ’90s and a strong labour market, starts are expected to still average around 200k this year… i.e., builders likely won’t be packing away their hammers anytime soon,” Porter concludes.