The surge in interest rates so far this year has contributed to a sharp decline in home sales but, so far at least, that has not weighed on construction activity. Housing starts averaged 279,000 annualised between May and July, 10% higher than the prior three-month average of 254,000. Most of that improvement was due to an increase in purpose-built rental developments, which now account for 41% of overall housing starts, triple the long-run average of 14%. With rents now growing at a double-digit annual pace in most cities, developers may shrug off the increase in borrowing costs this year and continue to launch new rental projects. The depressed level of new home sales means that non-rental housing starts will weaken before long, but trends in the rental sector could prevent overall starts from falling by as much as we had assumed, and likewise help Canada to avoid recession.
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