News: Inflation Forces Build Pause & House Price Growth Is Stable

In this week's Industry News (Week of 15 Nov 2021).

Canadian New Housing Starts Are Now Crashing As Inflation Forces Builders To Pause| Better Dwelling Canadian new housing starts are returning to reality as cheap capital starts to ease. The Canada Mortgage and Housing Corporation (CMHC), the country’s state-owned insurer, reported housing starts fell in October. Housing starts are exactly what they sound like — homes that have started construction. The drop was large enough to be considered a technical "crash" from earlier this year. This follows the trend of falling investment, which should drag starts even lower. Canada’s Elevated Inflation Is Hitting Home Builders The housing start slowdown might seem odd with resale purchasing so strong. The industry provided some insight on this a few weeks ago, explaining the risk of inflation. Homebuilders are having difficulty planning around volatile material costs. In some cases, this has forced some developers to go back to buyers and ask for extra funds to complete the home. Rather than overpricing the risk or risk an unprofitable development, they’re hitting pause. This has resulted in builders delaying half of the planned new housing developments. Don’t conflate falling housing starts with a shortage of supply in the pipeline. At the current rate, housing starts are 9% higher than they were in 2020. It’s also 13% higher than it was in 2019 as well. There’s more supply and relief than we saw pre-pandemic. The drop in new housing starts is more so an issue of the misallocation of capital (human and financial). When economies go all-in on an industry, normalization can mean a lot of capital finds itself in the wrong place. This leads to an adjustment phase where these resources optimize for better utilization. See full article here.

Canadian Housing October price growth stable but we expect that’s a seasonal blip | National Bank of Canada (Teranet-National Bank House Price Index)

It is quite typical to observe a lull in September and October after the summer strength. In fact, the evolution of the last two months was essentially in line with the average of the last ten years for these months. This is still a significant moderation relative to the previous 7 months, which were all substantially above their averages. For this reason, the 12-month price growth moderated but remains high at 15.8% for the composite 11. Over this period, no less than 80% of the 32 agglomerations posted increases of more than 10%, which testifies of the generalized nature of the increases in the country (right chart). Despite the deterioration in affordability over the past year and our expectation of higher mortgage interest rates going forward, we do not foresee a downward trend in prices for the next few months. See full report here.

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Konfidis is pleased to share our weekly real estate investing industry news piece herein. We love connecting with our members. Reach out with your questions to hello@konfidis.com.

Shael Soberano, CFA Konfidis Inc. Chief Investment Officer

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