Canadian New Home Building Intentions Are Well Into Correction Territory

Canadian real estate got some more bad news this week — building intentions are once again back in correction territory. Statistics Canada (Stat Can) data shows building permits made further declines in January. A sign of future activity, consistent declines may show building is past its peak. Permits are still much higher than was normal before 2020, so a supply shortage isn’t looming. The drop does show enthusiasm for future building intentions are fading fast, though.

Canadian Building Permits Fell 9%, Down 11% From Peak 

Canadian future building intentions are softening across residential and non-residential sectors. The seasonally adjusted value of permits fell to $10.1 billion in January, down 8.8% from the previous month. It peaked this past November and is now 10.96% lower from then, making this officially a correction. Most of this occurred in the residential sector, but more on that in a few. First, let’s look at the inflation-adjusted numbers. 

Canadian Future Building Intentions

The combined seasonally adjusted value of Canadian residential and non-residential building permits in current and inflation-adjusted dollars.

Source: Statistics Canada; Better Dwelling.

Canadian inflation is running so high it substantially cuts annual growth. Seasonally adjusted real growth made a monthly drop of 8.23% in January. According to Stat Can, the inflation adjusted peak was reached in March 2021. Permit values are now 17.54% lower than they were at that peak.

Home Building Intentions Are Down 18% From Peak 

Most building permit value is for residential real estate, which is behind the big drops. Seasonally adjusted residential building permits fell to $6.72 billion in January. This is down 11.63% from a month before, and 18.06% from the March 2021 peak. A drop of more than 10% is technically called a correction, while over 20% is a technical crash. Most of the decline was attributed to a sudden fall for multi-family units. 

The decline in building permits implies falling intentions for future home building. It might seem like a concern, but even with this drop, permits are almost 50% higher than pre-2020 activity. A decline of “excessive” demand, but still a lot of supply coming to market.

Canadian Future Building Intentions

The seasonally adjusted value of Canadian residential and non-residential building permits, and their respective trendlines.

Source: Statistics Canada; Better Dwelling.

Non-Residential Building Has Been Trending Higher

Non-residential buildings, such as commercial and institutional, fell slightly but generally improved. Seasonally adjusted building permits fell to $3.40 billion in January, down 2.72% from a month before. Unlike residential, this segment didn’t see a boom starting in 2020 — it cratered. Building is down from the previous month but we’re seeing the segment improve from lows. 

New building projects are pulling back after record activity, but remain elevated. Higher interest rates generally slow return expectations, reducing demand. A drop in demand might seem like a bad thing, but there was so much demand in Canada recently.

The excess demand didn’t just create higher home prices, it also drove building costs. Labor and material prices had been squeezed by such a large scale up of building over such a short period. This drove the cost of building higher as more homes were built, accelerating growth further. As normalization occurs, prices may improve while building remains stronger than before public health measures.