Too soon to sound the all-clear for construction

The turnaround in the housing market, with sales and prices rebounding in April, has raised hopes that construction will hold up despite elevated borrowing costs. Media reports suggest that buyer enquiries for pre-construction projects have rebounded, spurred on by strong immigration and rental growth. But any rebound in demand is occurring from a very low level. In Toronto, the six-month average of new home sales (mostly pre-construction sales) remained 60% below its long-run average in April. Even if new home sales doubled in the next few months, they would continue to point to lower housing starts, as developers struggle to secure financing without enough pre-construction commitments. While the strength of rental growth seems to suggest that purpose-built rental projects could fill the gap left by lower demand from individual buyers, the reality is that those projects are even more capital intensive due to the need to carry debt for decades. Accordingly, while the rebound in the housing market has reduced the risk of the economy falling into recession, the weakness of new home sales is still likely to weigh on construction activity later this year and contribute to a continued slowdown in overall GDP growth.